A Business History of India (PDF)

A BUSINESS HISTORY OF INDIA In recent decades, private investment has led an economic resurgence in India. But this is not the first time the region has witnessed impressive business growth. There have been many similar stories over the past 300 years. India’s economic history shows that capital w...

A BUSINESS HISTORY OF INDIA In recent decades, private investment has led an economic resurgence in India. But this is not the first time the region has witnessed impressive business growth. There have been many similar stories over the past 300 years. India’s economic history shows that capital was relatively expensive. How, then, did capitalism flourish in the region? How did companies and entrepreneurs deal with the shortage of key resources? Has there been a common pattern in responses to these issues over the centuries? Through detailed case studies of firms, entrepreneurs, and business commodities, Tirthankar Roy answers these questions. Roy bridges the approaches of business and economic history, illustrating the development of a distinctive regional capitalism. On each occasion of growth, connections with the global economy helped firms and entrepreneurs better manage risks. Making these deep connections between India’s economic past and present shows why history matters in its remaking of capitalism today. TIRTHANKAR ROY is Professor of Economic History at the London School of Economics and Political Science. He has published widely on South Asian history, global history, empires, and environmental history. His recent publications include The Economy of South Asia: From 1950 to the Present (2017) and India in the World Economy from Antiquity to the Present (2012). A BUSINESS HI STORY OF INDIA Enterprise and the Emergence of Capitalism from 1700 Tirthankar Roy London School of Economics and Political Science  University Printing House, Cambridge CB2 8BS, United Kingdom One Liberty Plaza, 20th Floor, New York, NY 10006, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia 314– 321, 3rd Floor, Plot 3, Splendor Forum, Jasola District Centre, New Delhi – 110025, India 79 Anson Road, #06– 04/06, Singapore 079906 Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning, and research at the highest international levels of excellence. www.cambridge.org Information on this title: www.cambridge.org/9781107186927 DOI: 10.1017/9781316906903 © Tirthankar Roy 2018 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2018 Printed in the United Kingdom by TJ International Ltd. Padstow Cornwall A catalogue record for this publication is available from the British Library. Library of Congress Cataloging-in-Publication Data Names: Roy, Tirthankar, author.  Title: A business history of India : enterprise and the emergence of capitalism from 1700 / Tirthankar Roy, London School of Economics and Political Science. Description: 1 Edition. | New York : Cambridge University Press, 2018. | Includes bibliographical references and index. Identifiers: LCCN 2017057287 | ISBN 9781107186927 (hardback) | ISBN 9781316637487 (paperback) Subjects: LCSH: India– Economic conditions. | India– Social conditions. | Business– India– History. | Economic history. Classification: LCC HC433.R698 2018 | DDC 330.954– dc23 LC record available at https://lccn.loc.gov/2017057287 ISBN 978-1-107-18692-7 Hardback ISBN 978-1-316-63748-7 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication and does not guarantee that any content on such websites is, or will remain, accurate or appropriate. For Asim Kumar Nanda  Contents List of Figures List of Maps List of Tables List of Boxes Preface 1 Introduction 2 The Baseline at 1700 3 The Indian Ocean Sphere: 1700– 1850 4 Capital and Empire (1850– 1930): Trade and Finance 5 Capital and Empire (1850– 1930): Industry 6 State and Industrialisation: 1930– 1950 7 State and Industrialisation: 1950– 1980 8 Revival: 1980– 2000 9 Capital and Globalisation: 2000– 2015 10 Conclusion References Index  Figures 2.1 View of Masulipatnam, 1676 3.1 Jamsetjee Jejeebhoy, c. 1857 3.2 Burrabazar, Calcutta 3.3 Premchand Roychand, merchant of Bombay, in the nineteenth century (see text) 4.1 Goods handled by ports and railways: 1871– 1937 (m tonnes) 4.2 Real net output (Rs. m) in 1946– 7 prices 4.3 Net output per person (Rs. in 1938– 9 prices) 4.4 Real net output (1821 = 100) and population 1821– 1941 4.5 Marwarree brokers (see also Fig. 4.3) 4.6 Kojahs 5.1 The British India Steam Navigation Company’s mail steamers alongside Latter Street Wharf (Rangoon), 1920s 6.1 Industrialisation and customs collection 1871– 1939 6.2 Tata Steel Factory in Jamshedpur, 1940s 6.3 Ghanshyam Das Birla with the congress politician Vallabhbhai Patel, c. 1940 6.4 Three businessmen of the interwar years with active public life 6.5 Three multinational entrepreneurs of the interwar years 6.6 Three industrialists from non-business backgrounds in the interwar years 7.1 The Great Nehruvian Divergence (Indian per capita income, constant price, percentage of world) 7.2 An Indian postage stamp (‘the factory worker 1954’) celebrating industrialisation 7.3 Foreign trade and government expenditure in GDP (in per cent) for India, 1900– 2010 7.4 Status of domestic trade in the Indian Economy (numbers are percentages) 7.5 Communist Party demonstration in 1966 7.6 External balance of goods and services, India 1960– 2000 (per cent of GDP) 8.1 Government and private investment (per cent of GDP) 8.2 The end of the ambassador car, 2017 8.3 Diamond polishing factory in Western India 9.1 Gross capital formation (per cent of GDP) 1950– 2012 9.2 Market capitalisation of Indian companies (per cent of world) 1990– 2015 9.3 Market capitalisation of listed companies (per cent of GDP) 1990– 2015  Maps 2.1 South Asia: Geographical features 2.2 British India (shaded) and princely states around 1900 3.1 Maritime routes c. 1650  Tables 4.1 Measures of growth (annual percentage change) in agriculture, trade, and modern industry: 1872– 1947 7.1 Price control orders, 1943– 84 7.2 Top 20 business groups, 1958 and 1981 7.3 Analysis of group trajectories, 1958– 81 7.4 Public companies, number, and share capital, 1951 7.5 Assets of Indo-British companies as share of top 25 business groups (in per cent), 1939– 97 9.1 Top 25 companies 2016 (bold means private ownership)  Boxes 7.1 Small-scale industry, 1950– 80 7.2 The state as trader 7.3 The state as industrialist 7.4 Private trade 7.5 Business organisation 8.1 The rise of retail 8.2 Small-scale industry, 1980– 2000  Preface When I started a career in economic history in the 1990s, interest in history was growing in the top economics schools of the world. The availability of cross-country historical income data, popularity of institutionalism, and new developments in the theory of growth rekindled interest in an old and half-forgotten question: Why do some countries grow rich and others remain poor? In the 2000s, historians criticised institutionalism. The exchange that followed became known as the divergence debate. In the last 20 years, the divergence debate formed the stem of the economic history field. I joined this discussion from a base in Indian history, and with a vague feeling that the divergence debate did not serve India well. Over the years, that feeling developed into an argument. The argument has two parts. First, the theoretical models used to explain how the world became more unequal from the nineteenth century, failed to explain the recent emergence of India and China. Models that predicted divergence could not predict convergence in an easy way, and therefore, they were unreliable as theories about the past. Second, the debate encouraged the student of world history to ask the wrong question, that is, why India fell behind Europe and stayed poor. Capitalists in the region – where the volume of trade grew hundredfold, and the fourth largest cotton mill industry of the world emerged in 1850– 1950 – did not either fall behind or stay poor. By starting with the falling-behind question, divergence historians missed the central paradox of Indian economic history: the coexistence of robust capitalism and stagnant agriculture. This book turns the narrative around. It is not about falling behind, nor about what went wrong with India. It is about capitalism, and what went right. As business history, it does what business historians do the world over, which is to study how firms, entrepreneurs, communities, and organisations adapt to the environment, or what happens to corporate governance when companies are run by families and small groups like the managing agents of the past. As economic history, it foregrounds what I believe is the biggest puzzle about India, indeed about emerging economies in general – how does capitalism grow in a region where capital is an expensive resource? The book is an attempt to answer this question. The idea of the book emerged from my association with business historians of the Harvard Business School, especially Geoffrey Jones and Walter Friedman, who brought me in contact with other overview projects under way or recently finished. Franco Amatori and Andrea Colli contributed to the making of the book in a similar way. In gathering raw material, Prerna Agarwal, Bhanu Phani Krishna, and Harsha Tiwary provided invaluable help. On various occasions, I have discussed the subject or matters related to it with Michael Aldous, Hemant Bangur, Raj Brown, Rudra Chatterjee, Bishnupriya Gupta, Sunil Khilnani, Abhijit Pathak, Gita Piramal, Anand V. Swamy, Stefan Tetzlaff, Chinmay Tumbe, and Rusheed Wadia. I am grateful to all of them for the conversations. A detailed and helpful report from a Reader for the Press led to significant improvements on a draft.  I owe a special debt to Douglas Haynes and Ashok Desai. Haynes, who has made a major contribution to interpretations of Indian capitalism and is researching the frontiers of consumption and business history, advanced this project through comments, discussions, and encouragement. Desai, possibly the only economic historian to have served as a consultant to the Government of India, and a trenchant commentator on current economic affairs, read the manuscript with care, pointed out errors, suggested improvements, ruthlessly criticised when criticisms were due, and directed me to new readings. Their association with the project was a source of strength. Before I conclude, a note on the use of sources is in order. Whereas Chapters 1– 6 (ending at 1950) draw on scholarly research, including my own, Chapters 7– 9 rely heavily on media reports drawn from Business World and Business India mainly, and online material available from newspaper websites (for one example, company history data from the stock market information page on specific companies available at http://economictimes.indiatimes.com/), as well as company websites. It is impossible to cite the hundreds of such resources I have used to construct narrative histories, and such citation would not necessarily add value to the bibliography. Therefore, I confine these citations to the minimum, and cite only when I quote from them.  1 Introduction ◈ The Book For almost a quarter of a century now, Indian economy has grown at an impressive pace. Private enterprise has led this growth. In the process, Indian companies have had to absorb new technologies and management ideas, reinvent or discard tradition, invite international partners, and become international themselves. What Indians are now living through is only the latest in a series of episodes that reshaped capitalism in the region. In the 1950s and 1960s, businesses had to adapt to a socialist and protectionist environment. A hundred years before that, businesses responded to the opportunities and risks created by free trade in the British Empire. And before the British Raj came into being, businesses dealt with the collapse of the Mughal Empire in the north, and the rise of the East India Company on the southern coast. Each one of these episodes was organically linked with the others.  This is a business history of India in the last 300 years. The field is rich and well developed. But this book aims to be different in two ways. First, it offers a connected narrative, that is, it links different times, major episodes, Indian history with world history, and economic history with the experience of firms, families, and communities. While writing a connected story, the book also answers the question: Is there something distinctly Indian about Indian business history? Conventional answers to the question consider unique features of Indian society such as caste or India’s subordinate position in the British colonial empire in the nineteenth century. Some may even deny the usefulness of the question. This book is different. It does have a leitmotif. And the leitmotif is neither caste nor colonial rule. A business history is an interesting enterprise because it tells us how capitalists obtain the resources that are essential for capitalism to grow. These resources include capital, technology, trust, managers, organisation, and skills. For most of the years covered in the book, some of these resources were scarce in India. For example, compared with Europe, where financial and commercial capitalism modernised in parallel roughly from the 1600s, trade and industry expanded in nineteenth century India in the presence of limited financial development and high interest rates. Capitalism developed, anomalously, in a region where capital was in short supply. The aim of the book is to show how scarcities like these manifested, how they were dealt with, and who dealt with them. Briefly, this book shows that transactions with the world economy eased these constraints in the long run, whereas locally, and in the short run, state policy and social conventions helped too. With the exception of a period of forty years in the mid-twentieth century (c. 1950– 90), the region was characterised by considerable openness. It was open to trade, traded a great deal, and was also open to transactions in capital, know-how, and skills. From the nineteenth century, modern industry emerged in the region because trade created the capacity to obtain funds from and buy technology and skills from abroad. The state mattered mainly in sustaining openness. During 1950– 90, the state intervened more deeply, curtailed openness, and controlled capital markets to push for industrialisation. The strategy raised investment, but proved unsustainable in the end, bringing back a modified type of openness. Both these pathways – led by openness or by the state – involved successes as well as failures, opportunities as well as risks. In addition, this book has a secondary aim. The scholarship on Indian business history is usually narrative, biographical, and regional.1 Students in management schools and economics courses are exposed to theories of entrepreneurship, of firm structure, and capital structure, which should have relevance for the history of entrepreneurs and firms in any region. The Indianist scholarship does not usually make connections between theory and history, leaving India’s relevance to theory to be deduced. A business history should show how discourses about the origin of entrepreneurship, and ownership of firms, help thinking about the case in question. In that spirit, the next section will discuss history and theory in mutual relation. The discussion is selective and India-centred, in that it deals only with those topics where theories of entrepreneurship and organisation have obvious relevance for the case study. For a more systematic introduction to the conceptual frameworks in use worldwide, readers will need to consult another work.2 This statement of aims suggests a map for the rest of the introduction. I will discuss, in that order, the field, the key question, links between theory and history, and plan of the book, in four sections that form the remainder of this chapter. The Field Business history scholarship in the last fifty odd years has developed around one main question, and a number of other subsidiary themes that bear an indirect relationship to it. The main question is this: What should be the unit of analysis, the society, the state, or the individual? The subsidiary questions relate to specific historical problems or episodes. For example, how we should read the coexistence of foreign and Indian capital in colonial India (c. 1858– 1947), or what role big business played in shaping India’s economic policy around 1950, or more recently, the difference between port cities and small towns in the pattern of capitalist development. These are some of the themes that have generated clusters of research and historiographical debates. These subsidiary topics will be discussed in appropriate contexts in later chapters. This section will deal with the main stem of the historiography: the unit of analysis problem. If we exclude sponsored company histories and flowery biographies of a few stalwarts, serious scholarship on the subject began with a report written by the economist Dhananjay Ramchandra Gadgil in 1959, as an offshoot of an earlier work on industrialisation in India.3 Gadgil’s report made an emphatic claim that social collectives like caste and community should be the subject of business history. He had a point. Contemporary modernisation theory had suggested that entrepreneurship was an attribute of individuals who could see the future before others did. For India around 1700, entrepreneurship did not quite mean individuals like that. There are few biographies available to tell us which individuals were being prescient in sensing profit opportunities. More often, the successful capitalist was the member of an ethnic group, a community. Without the support of that group, enterprise would not succeed. The staple ingredient in Indian business history, therefore, is the business community: the Parsis, Marwaris, Khatris, Bhatias, Jains, Bohras, Chettiars, Labbais, and many others.4 The bias stems partly from the type of sources available to us, but we cannot say that it is entirely an illusion created by the sources. In contemporary North American and Soviet scholarship on India, the idea that Indian entrepreneurship was embedded in society had already struck deep roots. Indian capitalists were seen through the lens of Max Weber and Karl Marx, as an undifferentiated type. The purpose was to show why India fell behind Europe since the eighteenth century in the potentials for capitalism, especially industrial capitalism, to develop. American theorists believed that ‘entrepreneurship’ was a scarce resource that a society needed crucially for ‘take off to self-sustained growth’ and suggested, after Weber, that the social organisation in India or China suppressed the entrepreneurial instinct.5 In the 1940s, Soviet scholars characterised Indian capitalists as ‘comprador’, or agents of foreign capital, and incapable of industrialising on their own.6 While the orthodox Marxist discussion about Indian capitalists was caught up in ideological debates along party lines, more independent Marxist works, such as Charles Bettelheim’s, characterised the Indian big business as too mercantile, finance-oriented, and too inclined after quick profits to lead a deeper sort of capitalist transformation.7  There were, and are, two types of reaction to these characterisations. Some scholars presented their research explicitly in opposition to these, emphasising individual agency or entrepreneurship more than the role of the society and social organisation like caste and community, and disputing the notion that Indian capitalism was deficient because it was constrained by society.8 ‘The available empirical data point to the fallacy of overemphasis on … social organisation in the study of entrepreneurial development in India’, writes Dwijendra Tripathi.9 Others accept that there were deficiencies and problems of the situation in which capitalists operated, but see these deficiencies to be embedded in the state, or in politics. The hostile attitude of the British Raj, this scholarship suggests, posed an obstacle to rapid industrialisation in colonial India.10 ‘The development of Indian … capitalism was … stunted and severely limited’ by the policies of the colonial state.11 Still others believe the deficiencies to be embedded in structural conditions like shortage of capital, labour, technology, and demand, and then blame the British Indian state for not removing these obstacles.12 Anthropological studies of business communities to appear from the 1970s emphasised another dimension of social organisation. Far from making the Indian capitalists deficient in some sense, caste and community bonds helped them take risks and sense opportunities, as social ties fostered entrepreneurship rather than suppressing it. ‘The joint family and strong particularistic caste loyalties’, writes Thomas Timberg in The Marwaris, ‘are the secret of success in Indian entrepreneurshi’.13 And David Rudner explains the ‘secret of success’ of the Nattukottai Chettiar bankers in this way: ‘ … varieties of financial instruments, patterns of inter-firm deposits, and even systems of accounting categories all revolved around the social organisation of their caste.’14 The attraction of ‘caste’ has a reason. India seems, to many scholars, to be a natural experiment for a beguilingly simple yet powerful theory of why culture matters to business performance. Business needs cooperation to succeed. Recent literature on ‘business groups’, institutional economic history, ‘social capital’, ‘networks’, and the origin of commercial law, stress this point in different ways.15 In the past, cooperation was crucial to address four issues; specifically, poor information, missing markets, missing laws, and collective bargaining. In an environment where capital markets were missing and information scarce, social ties could act as channels for exchange of information and means of negotiation for cheap credit. Where commercial laws were undeveloped, social ties could be the means to enforce contract. Merchants also needed to negotiate with kings to obtain diplomatic immunity or the authority to follow their own civil law. Cooperation in some of these senses may work better in the presence of strong social ties based on shared rituals, marriage rules, and commensality among members of a group. Ethnic combines like caste ensured that members followed rules by threatening to drive them out of society if they did not. The expectation that strong social ties did foster cooperation makes India, with its caste system, a field to test the idea. Nearly all usage of the idea with Indian examples have two features: common social identity of principal and agent, and the extended family or the community as the foundation of common identity.16 The common identity ensured keeping of trust, or avoided agency costs that might appear in the presence of limited information, and performed a variety of support functions such as supply of credit, easier travel, profit-sharing, and apprenticeship.17 This book does not discount the role of social ties in explaining business outcomes, and does not dispute that the concept or the idiom of caste carried a particularly strong moral force in India. Still, most historical evidence suggests that the use of caste or community as a principal business resource was prominent only in certain times and places. For example, in eighteenth century India, as the Mughal Empire collapsed and the axis of Indian capitalism shifted from overland trade to the ports, a massive migration and relocation of enterprise occurred. Most of the prominent business communities of the nineteenth century had changed the nature of their business during this political shift. Several groups, including the Marwaris, moved a long distance away from their original homes. They needed to reinvent cooperative bonds. Conditions were quite different in the port cities. The port city capitalist needed to develop links that cut across communities, not least because the scale of businesses had grown too much to rely on the resources supplied by friends and relations. If caste as a business resource is so historically specific, then we ought to employ the concept of the ethnic business community in a limited manner. Any attempt to claim more, and suggest that these notions could define Indian business in some essential ways, is likely to fail. There are two fundamental reasons why it would. First, the theory would not fit the facts of history very well. Names of caste or community almost never fit perfectly with a core set of shared norms or values. The people that all North Indians used to call ‘Marwari’ around 1960 did not form a single caste, were very diverse and unequal among them, and did not conduct the same kind of business everywhere. The history of the Parsis shows as many instances of quarrel as of cooperation. Furthermore, when we do have biographical material on the pioneering industrialist, we should find many examples where their success happened despite resistance by the community. Community does not function in the way it did in the past any more. From the mid-twentieth century, if not much earlier, it started to become obsolete as a business resource, if not as a sentiment. We see this process in the 1920s when the leadership in collective negotiation passed on from sectarian bodies to national chambers of commerce. More recently, the maturity of capital and information markets made informal modes of exchanging information redundant. Globalisation changed communities from within. The Parsis started moving away from trade and industry as early as 1900, and gradually became a global set mainly engaged in the professions and the creative fields. A similar diversification has characterised all ethnic business groups of India, if at different speeds. The theory that caste or community is the definition of Indian business cannot easily explain why strong social ties become weak in these ways. Second, if the strength of social ties is prone to be exaggerated, the importance of weak social ties is prone to be underestimated. In the nineteenth century port cities such as Bombay or Calcutta, which were home to many castes, religious groups, and languages, frequently partnerships formed between people who were not related by marriage, rituals, and commensality. These examples point at the ‘the strength of weak ties’.18 While caste members bound by strong ties may have secured cooperation within the group, groups that place too much value on loyalty to elders and conformity to norms are not very good at nurturing innovation and creativity. When many socially unrelated people have the chance to interact with each other, more novel ideas are exchanged among them. Another name for this situation is cosmopolitanism. Not surprisingly, factory industrialisation was a novel idea that succeeded in Bombay and Calcutta, and not in an interior business town such as Benares or Mathura, where many Indian banking families lived. Weak ties and not strong ones, cosmopolitanism, and not exclusive strategies by groups, allowed fuller play of entrepreneurship in the port city milieu. Commenting on these themes in 1985, Rajnarayan Chandavarkar criticised the tendency of contemporary historians to explain new business formation in India either as a triumph of the entrepreneurial spirit or as a triumph of shared tradition.19 Both approaches tend to overstate ‘triumph’, and understate failures. He showed how Indian businesses had to adapt to the persistently high cost of capital, even in a city like Bombay where the capital market was relatively developed. While this was the general situation, the few industrialists who did succeed in raising money easily, tended to take undue risks, make bad investments, and over-extend resources, often resulting in ‘spectacular failures’.20 The essay made a good case to look at the context of entrepreneurial decision more closely, suggesting that neither the entrepreneurial spirit nor social ties was a good enough resource to overcome the massive obstacles and scarcities capitalists often dealt with. To sum up, we do need to understand the agency of the firms and entrepreneurs in context. This discussion should lead us to conclude that social constructs like caste or community as such do not supply a sufficient definition of the context. These things did play a role, but a contingent one, specific to some types of enterprise, and neither uniformly positive nor uniformly negative a role. If society cannot define the context adequately, can state do that better? An almost parallel argument can be made for that theory which attributes business failure by Indians too readily to British colonial repression, and business success of Indians readily to heroic struggles against British repression. Political environments matter, as we shall see, for various reasons and at all times. But the idea that it matters above all as repression, and in the guise of British imperial rule, begs in the assumption that the particular difficulties that Chandavarkar talks about did not exist before British rule, and disappeared after colonialism ended. This was far from the case. Merchants and industrialists struggled with the high cost of capital from before British rule and for long after the end of colonialism, as I will argue in a moment. The state does enter this story, mainly in two ways. First, the state was directly important as an investment agent for a relatively short time span in the mid-twentieth century. And second, in several indirect ways, especially as a legislating body, the state was also important in the colonial times. While not losing sight of the state, this book focuses on the world economy, or markets and market integration more generally. The pervasive high cost of capital in the region supplies us with an ambitious pivotal question: how was this obstacle of a limited capital market overcome? And the answer revolves around the opportunities created by integration of the Indian economy with world markets in commodities and factors, and briefly in the twentieth century, around state intervention. Why is the cost of ‘capital’ so crucial to the story?  The Question From roughly 1700, private enterprise the world over needed to deal with challenges that were relatively new in origin. The emergence of large-scale transnational trading firms required raising big money. Industrialisation required even bigger amounts of money that would stay locked up in machines for a long time. From the financiers’ point of view, this was a wholly new game from financing trade, where money circulated among known parties in a seasonal rhythm. Industrialisation required managing technology. Mass production of goods and services required managing a large and specialised workforce and reaching out to anonymous consumers. Railways and steam ships spread trade geographically, made firms mobile and multicentred, and demanded ways to manage distance. Successful adaptation to these challenges could enhance the capacity of the firms to make investments, raise productivity, offer higher wages, and create jobs, and in these ways lay the foundation for what Simon Kuznets called ‘modern’ economic growth. Some of these problems were particularly challenging in India: trade costs were high (Chapter 2); capital was costlier; there were no indigenous industry-making machines; artisanal tools were simple in construction; artisanal skills were manual rather than mechanical in character; and labour was tied to land. With the financial and scientific revolution in Western Europe from the 1700s, a divergence in conditions would have emerged between Europe and India. This can be easily demonstrated with the example of cost of credit. In the mid-1600s, ‘good loans did not bring much over 6%’ in England.21 Rates for commercial loans in the Dutch Republic were not very different. From 1700, there was a sharp fall in interest rates from levels like these in the Dutch Republic, in England, France, and Italy. Interest rates in contemporary India were twice as high as in the major financial centres in Europe. Despite the emergence of big banking firms like the Jagatseths (see Chapter 4), there was no long-term tendency in interest rates between 1660 and 1760.22 Shireen Moosvi shows that nominal interest rate fell somewhat (from 18 to 24 per cent modal rate to about 12) through the seventeenth century.23 But 12 per cent for a trade loan was still high. Borrowing at such rates to trade, let alone to invest in industry, would very likely bankrupt most firms. When the British East India Company settled down to rule Bengal in the late eighteenth century, many of the clients of the bankers had been bankrupt military families. Their bankers charged them 30– 40 per cent. Interest rates in the range of 10– 12 per cent per year were common in 1772 among merchants (the East India Company took these rates as benchmark in debt disputes), 17– 18 per cent common in 1857– 8 (European businesses borrowed at such rates from Indian bankers), and 12– 18 common in urban moneylending around 1910.24 Provincial Banking Enquiry data show that in 1929, inland bankers of North India charged 9– 12 per cent for loans to relatives, 18 per cent for loans to merchants, 24 per cent for loans to landlords, and 38 per cent for loans to peasants. There was robust growth of corporate banking in India after 1860. Available data show that the share of private credit in GDP increased in India between 1870 and 1935. From the late 1700s, new banks formed, and banking laws were reformed and remade in the same pattern as British company law. Bank deposits as a proportion of GDP increased from less than 1 per cent in 1870 to 12 per cent in 1935, and hovered around that percentage until the 1990s when it started rising again. There is little evidence (see interest rates just cited) that the cost of capital fell in response to these changes. After independence (1947), with the further growth of private corporate banks, the cost of short-term secured borrowing fell to 4– 5 per cent (1950s). But long-term capital remained scarce. With the exception of a small number of top industrial firms, ‘long-term credit … was probably not available other than from the public market, … or from the unorganized market in small amounts at very high rates’.25 The situation did not improve after the nationalisation of the banks in 1969; the purpose of the move was explicitly to direct capital away from the larger businesses to make loans available for peasants and craftspeople. Why was capital persistently costly in India? We can take three approaches to answering this question: institutional, political, and geographical-structural. To some extent, the Europe– India divergence since the 1600s in average cost of capital had been owed to exceptional tendencies in Europe itself. The emergence of joint-stock banking, a market in government securities, and wide use of negotiable instruments set the European pathway in financial development apart. One strand in the historical scholarship on Europe explains financial development by politics. Weber drew attention to the ‘memorable alliance between the rising states and the sought-after and privileged capitalist powers that was a major factor in creating modern capitalism’.26 Joseph Schumpeter explained financial development as a more autonomous process, one in which politics played a facilitating role. ‘[T]he rise’ of capitalism, in this account, meant ‘the development of the law and practice of negotiable paper and of “created” deposits’, a process helped by state power to sanction commercial law as the law of the land, and in specific cases, the existence of central banks.27 States burdened by large debt tended to swap debt for equity, which aided what development economists call ‘financial deepening’. New institutional economic history suggests yet another manner of linking state formation and financial market formation.28 States that are strong yet accountable should create conditions for financial development, mainly by guaranteeing its liabilities, which would also make the liabilities more tradeable. There is nothing wrong with any of this, except that these arguments leave the experience of the non-European world open to inference. During the 1600s and 1700s, Indian states fought battles, were short of money, and would have benefited from a stronger financial system. That such an outcome did not occur is surely a puzzle. It is sometimes said that the East India Company in certain times pursued policies that may have reduced money supply in territories under its rule. No one knows the extent of the effect, however, and the problem of high cost of capital was not confined to limited periods of time or specific regions. The most plausible explanation for high cost of capital, I believe, is a geographical-structural one. Being a tropical monsoon region, Indian livelihoods display seasonal boom and slack in economic activity on a scale not visible in many other societies, and certainly not in the West. This condition made for large fluctuations in demand for money and interest rates within the year. The attraction of earning a windfall income in the short-term money market was so great that money was kept idle in the slack season rather than being lent long term.29 The great Indian paradox is this: no matter the scarcity of capital, capitalism flourished in India. The region was pivotal to the Indian Ocean trade in the seventeenth and eighteenth centuries. Indo-China trade in the early-1800s created enormous wealth in Bombay and Calcutta. The volume of long-distance trade in India grew from roughly 1 million tonnes in 1840 to 160 million in 1940.30 With realistic estimates of national income growth, this extent of trade growth would mean a dramatic rise in the ratio of trade to income, possibly from 1 to 2 per cent in 1800 to more than 20 per cent in 1914. Between 1860 and 1940, employment in factories in India increased from near-zero to 2 million. The growth was comparable with that in the two other emerging economies of the time, Japan and Russia, but with few parallels in the tropical world. India – and Indians – led the contemporary developing world in the two main industries of the industrial revolution: cotton textiles and iron and steel. In 1928, 48 per cent of the cotton spindles installed outside Europe, North America, and Japan were in India.31 In 1935, 50 per cent of the steel produced outside Europe, North America, and Japan was produced in India.32 At the time of independence in 1947, the port cities in India were homes to some of the best schools, colleges, hospitals, universities, banks, insurance companies, and learned societies available outside the Western world. A big part of that infrastructure had been created by the Indian merchants and industrialists. How do we explain this paradox? How did the capitalists overcome the scarcity of vital resources necessary for capitalism to develop? Economic historians recognise that a problem such as this one exists for more than half of the world that used to be called ‘the periphery’ of Western Europe. Inspired by Alexander Gerschenkron’s writings, they coined the term ‘late industrialisation’, asked a similar question, mainly with reference to unified Germany, imperial Russia, Meiji Japan, and late-twentieth century South Korea, and answered the question with the proposition that activist states made the most significant difference, though the methods of state intervention differed.33 I find the state-centric theories unconvincing and unhelpful to explain the main tendencies of Indian business history. Until 1950, India did not have a state that was either large or interventionist. A lot that happened in India before or after the rise of the West (c. 1850), happened because of actions by merchants and bankers, not governments. The state mattered much more after 1950, and what it did then entailed gains as well as costs for private enterprise, as we shall see. During the times when the state was an indirect agent at best, the world economy played a more positive role. Cosmopolitanism and the strength of weak ties in the port cities and their satellites explain some of the risk-taking and offbeat decisions that did happen. In theory, resources in short supply can be obtained relatively easily if markets for capital, technology, and services are as open as the markets for goods. Free movement of capital and skilled labour can meet shortages to some extent. In the 1870s, the cotton mill owner of Bombay or Ahmedabad would hire foremen from Manchester; usually such people came with the machines purchased there, and some of the pioneers teamed up with people with intimate knowledge of Manchester textiles. In the 2000s again, a lot of technology and skills came in along with foreign investment. Except for a few decades after 1950, factor markets were always relatively open in India. The state was not unimportant. During the Mughal era and for a considerable time after the decline of the Empire, the revenue system served as a catalyst for a great deal of trading and banking enterprise. This effect was more muted in the seaboard, however. During British colonial rule, institutions and organisations also mitigated scarcity in some ways. Introduction of the joint-stock company helped entrepreneurs pool in public capital; and limited liability limited the owners’ risks. The joint-stock principle came into India through European enterprise, but was consolidated via state intervention. The managing agency system, an Indo- British innovation, served a variety of roles in mitigating the shortages, one of these being conservation of managerial resources. Society also contributed to business formation. Caste, community, and family networks helped to mitigate the cost of credit to some extent, and helped in the supply of managers from within the family. But the world economy and the state created the framework for private enterprise to operate. While markets and states explain the general patterns, biographies of entrepreneurs show how in specific instances specific tools were used to overcome shortage of key resources. Given the scarcity of biographies of some of the pioneers, we may never be able to write this story fully. Why, among hundreds of merchants and moneylenders doing routine business in Ahmedabad town in the 1850s, one gentleman decided to start a cotton mill at great odds and not with much help from fellow capitalists of the city, remains something of an enigma. A good biography does exist of this person. For most pioneers, the background to key decisions remains far more obscure. Where sources are scarce, can theory shed some light? Theory and History The classic question for analytical business history is why some firms grow faster than others. Whereas economists interested in this issue focus on the structure of firms and markets, theories of entrepreneurship consider the individual behind the firm, and hold innovation and risk-taking to be the mark of entrepreneurship. Older and newer theories of entrepreneurship share an interest in correct profiling of the innovative individual. Although interest in the individual has been revived recently via a desire to understand the tech firm prodigies, increasingly the mainstream scholarship does the profiling job in mundane ways, by making use of statistics, and seeking empirical regularity among small firms.34 Systematic interest in the entrepreneur, however, has an impressive pedigree. It is tied to a curiosity about how capitalism works. A central idea is that capitalism, unlike any other economic system known to humankind, is mainly made up of a set of people whose income is uncertain, and subject to risk. The Irish-French thinker Richard Cantillon, whose work is described as ‘the springboard’ for Adam Smith, saw virtually anyone who did not own land or work for wages to fit that description, though merchants fit it especially well.35 Response to risk in an uncertain environment required such people to move capital between alternative uses, thus giving rise to a variety of dynamic outcomes, including the growth of towns and the creation of value in unexpected ways. Although the entrepreneur as an agent of change became obscure when economic theory was remade in the twentieth century, the idea that allocation under uncertainty involved a kind of decision-making that economic theory did not capture well, lived on. Uncertainty, scarcity of information, and mistakes about information are so pervasive that they place economies perpetually off the demand-supply equilibrium, and drive some agents (call them entrepreneurs) to strive to improve their situation by reallocating capital. In Israel Kirzner’s words, seeing how systematic this condition is would make economic theory ‘a process-conscious market theory, which makes reference to entrepreneurship [as opposed to] an equilibrium market theory, which ignores entrepreneurship’.36 Another name for ‘process’ is ‘history’. Allocation of resources with full knowledge of alternatives is one thing, and allocation of resources while making guesses about correct knowledge is another thing. The latter is the normal condition of capitalism, and produces the type of individual whom Kirzner calls ‘prescient’. A parallel tradition in conceptualising capitalism as an intrinsically unstable and dynamic system derives from economic sociology, especially the economic history of Max Weber and Joseph Schumpeter. Weber recognised that capitalism in the form of a bundle of firms, markets, putting out contracts, banks, coded commercial law, and ‘the privileged traditionalism of the guild’, had been in existence in Europe from the late medieval age. Around 1600, ‘this leisureliness was suddenly destroyed, and often entirely without any essential change in the form of organization, such as the transition to a unified factory, to mechanical weaving, etc’.37 All that happened was that ‘some young men from the putting out families’ began to expand the scale of their business, changed the contracts and incentives, increased supervision, and took control over production. For Weber, ‘the motive force’ behind this transformation was not a change in the amount of capital employed, ‘but, above all, of the development of the spirit of capitalism’, which made control over the process that created economic value a new priority. Weber’s conception of where that spirit came from in Europe and remained inchoate in India or China was not perfectly testable and yet drew an inordinate amount of attention. But the problem he posed remained and, consistent with his vision, it was a problem for global history. Did the motivational force behind capitalism appear at different times in different places, and if so, why? Schumpeter, who would call such actions creating a ‘new combination’ out of existing resources, saw these actions as intrinsic to the modern history of capitalism, as Weber did. Unlike Weber, who left the historical origin of the propensity insufficiently explained, Schumpeter had a definite conception of the springboard of new combinations, which was growth of credit money by the banking system, and with it, new instruments like negotiable paper.38 This historical condition from the 1600s made ‘ruptures’ more likely than before: ‘And the agent of change is the path-breaking entrepreneur who, aided by the elasticity of the cash and credit system, is able at discontinuous intervals to wrest control of productive factors from their normal uses and reassemble them in novel combinations.’39 Like Weber’s ‘spirit’, credit money opens up a new question in global history: Does the growth of credit money and negotiable instruments occur at different times in different places, and if so, why? Are these ideas useful in understanding capitalism in India? Yes and no. Because of source limitation, a great deal of entrepreneurship seems embedded in the behaviour of whole communities in India of the 1600s. It is difficult to see the agency of individuals, or even groups, in seeking control or creating new combinations. And yet, there cannot be any doubt that something did change in this time. Indians had their own capitalism before the Europeans started trading in Asia in a big way. However, after 1600, the two traditions interacted ever more closely in the port cities, fusing into a new combination. Capitalism had been there before, but it was becoming a new thing thereafter, globally as well as in India. The word ‘capitalism’ in the title of this book follows the Europeanist tradition of seeing a qualitative break around the 1600s, but does not follow Eurocentric definitions of what that break meant, which usually smuggle in preconceived notions of dominance and power. The manner in which markets and firms combined traditionally began to change in India too, roughly at the same time. Having said that, the precise contours of the change remain shadowy. One thing is clear though. The joint-stock firms, corporate banks, negotiable credit instruments, coded commercial law, industrialisation, and a new imperial state that legislated after European precedent brought the two traditions nearer to one another; though irreducible differences remained between European enterprise in India and indigenous enterprise, as we shall see. This mention of firms, especially joint-stock firms, brings us to another important body of theory relevant for the historian. Entrepreneurs create value. So do firms. A great deal of the theory of the firm builds around the idea of the limited liability joint-stock company. This was a revolutionary way to address many of the challenges that industrialisation posed; mainly, the problem of raising capital on a large scale, and to a more limited extent, professionalising management. For reasons that are not wholly clear, the joint-stock concept appeared earlier in Europe and was an importation into India in the 1800s with European expansion. The joint-stock company concept solved some problems, but created a big new problem, one that did not exist in the purely family-run firms: that of corporate governance. The discourse on why the structure of ownership of a joint-stock company matters, starts from Adam Smith’s conjecture that joint-stock firms can cause managers to misuse the owners’ money. The conjecture led to the theory of agency in the 1970s, which highlights the role of ‘monitoring’ behind the value and performance of firms.40 In a family firm, where managers are also the major owners, the cost of monitoring of managers by owners would be low. However, managers recruited from the family or those loyal to it will have less independence, which is not good for the firm. And majority shareholders from the family can short-change minority shareholders from the public.41 For these reasons, diffused ownership combined with good monitoring systems may be ideal.42 Good corporate governance can be defined as a bundle of practices that maximise shareholder value irrespective of the ownership structure. Industrial firms with good corporate governance may still find themselves short of capital and opportunity for growth. The theory of the ideal capital structure of firms started by comparing debt and equity as two modes of funding firms’ investment. Equity raised from the public is usually cheaper for the owners of the firm than raising debt. This definitely was the case in India which had a high-cost capital market, but raising more equity capital increases the threat of stock market takeover, and raises monitoring problems. Development of bank credit is safer for owners, but more costly. A large literature in financial economics makes the prediction that ‘financial development’ in the long run would make investment by firms, and therefore economic growth, more likely.43 Financial development includes greater supply of money, changing the profile of the money suppliers, and improvement in regulatory law-making for better monitoring of corporate governance practices, all adding up to a fall in transaction costs in the credit market and in the direct cost of capital. This overview of the literature on the firm leads us to make four propositions that clarify trends in business organisation in India since the nineteenth century, when the joint stock, limited liability, and the stock market became established concepts. First, there was a persistent, if slowly narrowing gap between two capital strategies. In starting new industrial or trading enterprises, Indian business firms usually resourced capital internally. Most Indian investors relied on their own money, or their friends’ money. Those families who had been trading or banking for some generations, therefore, were likelier to make industrial investment, reinforcing community bonds. The link between own resources and new investment was close for the Europeans too, but Europeans tried using alternative ways to raise finance from an earlier point and to a greater extent than the Indians did. These alternative ways including selling shares in London, recruitment of non-family partners with money, and selling shares in India. And because they did, most European firms conformed more closely to the legal concept of the company or partnership than did the Indians. Second, both the Indian model and the Indo-European model involved own governance issues, as we shall see in Chapters 5 and 7 especially. Both types – the Indian-origin family firms and the Indo-European companies run by managing agencies – came to the stock market from the late nineteenth century. Managing agency contracts, in principle, weakened shareholder power, whereas management practices inside families were not transparent. The managing agency was eventually abolished in 1970 in recognition of its principal failing. Disciplining families was not easy, however. Indian companies generally resorted to the market more sparingly than did the foreign companies. This feature persisted until recent times. Company shares formed a small part of household savings and fresh investment until recently. Shareholding by owners and owner-affiliated companies and trusts in managed companies tended to be high. Bank loans were either expensive or limited. Other types of debt, such as debentures or long-term corporate bonds and fixed deposits, were expensive and used sparingly.  Third, both types needed to create a reputation for good corporate governance to improve their chance of raising money from the stock market. A reputation for good corporate governance was fixed on a family or on a managing agency. From this feature, a further effect followed: the emergence of the ‘business group’, a cluster of companies linked together either by a family name, like Tata, or by an agent’s name, like Andrew Yule. Is reputation, attached to family name rather than company name, the reason why family firms survived in India for a very long time? The idea that reputation mattered to success in raising finance has generated an extensive literature.44 Those who think reputation matters point at the persistence of the family-run businesses in India. Those who criticise the concept point at the difficulty in identifying a common pattern in family management, and the changing and evolving nature of involvement of the family.45 Fourth, in parallel with the difference in ownership of firms, there was a difference in management. Most Indo-European companies hired managers and recruited partners from a Britain-based pool, although some of them had wide experience of working in other parts of the empire before coming to India, or left India to join businesses in Southeast Asia or East Africa. If one advantage of a family firm was in arranging money from own sources or from social networks, another advantage was in resourcing management from within the family. Several of the largest business groups in the 1950s conformed to a classic model of a family firm, one that supplied both financial and managerial services from within the family. On average, the postcolonial generation of business magnates had many sons, which helped them do this without major problems. But increasingly, the scale of businesses grew too big for the demographic resources of families, and the supply of professional managers expanded. The material discussed in this book will suggest that in many conglomerates now, which are family-run in name, ownership and management have diverged. Owners usually engage actively in new ventures, but not in the running of existing enterprises. The family neither manages nor funds the companies, but functions as a loose kind of brand. To conclude this discussion, how capitalists resourced capital, technology, and management skills, and with what consequence, lies at the heart of the book. Narrative history returns to this theme in almost every chapter. On every occasion, the state and world economy set the parameters, subject to which formal and informal institutions, and individual enterprise, make a difference. The balance between the ingredients varies, however. I distinguish five episodes during which these resources were obtained by different means. Plan of the Book The chapters that follow present a narrative history of enterprise, actors, and the political economic backdrop. Chapters 2 and 3 discuss firms and entrepreneurs against the backdrop of consolidation of the European companies on the coast, and the emergence of a new empire from maritime trade. I characterise India in 1700 as a world split between two halves: land- based trade and maritime trade. The two joined at times, but were mainly autonomous from one another. Capital was resourced by those who populated these spheres quite differently, with a significantly larger role for external finance in the maritime sphere. During the eighteenth century, the separation began to end as maritime traders captured state power, while the decline of state power in North India drove merchants and bankers towards the coast. Chapters 4 and 5 study merchants and industrialists during the nineteenth-century globalisation, when new methods of sourcing capital, technology, and personnel came into existence. Corporate forms and corporate governance are big themes. A significant feature was the integrating role of agriculture. Trade was based on agricultural goods mainly; the main stem of banking was the finance of agricultural operations; and industrialisation was based on processing agricultural material. The integration made it possible for traders and bankers to move money from traditional activities (cotton trading) to non-traditional ones (cotton mill), and made for a certain balance in the external transactions. Agricultural export created the capacity to purchase the services of workers and managers from abroad, buy technology, and pay interest on foreign loans in this era. The Great Depression upset the balance. Chapter 6 deals with the post- Depression reorientation and protectionist turn, when foreign trade lost its appeal, and industrialisation became the goal of state policy. After 1947, new instruments in addition to protectionism were employed in the pursuit of state-led industrialisation. Trade in general and traditional exports like agricultural goods and textiles fell in priority. With this shift, many firms and entrepreneurs nurtured in the earlier times disappeared. Chapter 7 explores how others got the chance to diversify and form conglomerates. Financing investment, however, had not been made any easier than before. Government regulation on private banking restrained the emergence of a capitalist financial system. Foreign capital had been restrained too. Taxpayers’ money and scarce foreign exchange were spent on industries that did not create export capacity. Repeated shocks from the world economy (1967, 1973, 1979, and 1991) showed how badly the economy’s capacity to finance investment had been compromised. From the 1980s, industrialisation and protectionism lost their central role in driving business growth, and there was a gradual return to comparative advantage. This no longer involved agricultural export, but the export of labour-intensive industrial products, and skilled services. Completely new fields of entrepreneurship opened. Most old conglomerates and families retreated, relatively speaking. Chapters 8 and 9 show how the capacity to resource capital from the world vastly improved, enabling the import of technology. The domestic financial system, however, continued to be state-dominated and its capacity to support the ongoing transition was limited. Whether we consider the 1600s or the 2000s, the two themes that bind the chapters together are state/politics, and the world economy or openness. These are the units of analysis here, in that interventions by the state, and input and ideas obtained from abroad created the environment, which families, communities, and individuals tried to make the best use of. Openness, which had always been a feature of the seaboard economies, began to play a different, more qualitative role from the 1600s with the entry of European joint-stock companies in Asian trade. The narrative starts from that theme, as we see in Chapter 2. 1The two aims of this book make it a distinct contribution to the field. However, excellent syntheses and surveys that attempt to render a coherence to the field have appeared recently. The interested reader should consult Dwijendra Tripathi, The Oxford History of Indian Business, New Delhi: Oxford University Press, 2004; Dwijendra Tripathi and Jyoti Jumani, The Oxford History of Contemporary Indian Business, New Delhi: Oxford University Press, 2013; and Medha M. Kudaisya, ed., The Oxford India Anthology of Business History, New Delhi: Oxford University Press, 2011. A new series in business history published by Penguin India since 2012, led by Gurcharan Das, has produced useful works on merchant communities and regions, but it is yet to address the colonial period fully. See also the entertaining and informative popular history books by Gita Piramal, especially Business Legends, New Delhi: Penguin, 1998. Finally, N. Benjamin and P. N. Rath’s Modern Indian Business History: A Bibliographic Survey, Pune: Gokhale Institute of Politics and Economics, no date, is a useful reference on the older scholarship. 2For example, Franco Amatori and Andrea Colli, Business History: Complexities and Comparisons, Abingdon and New York: Routledge, 2011. 3Dhananjay Ramchandra Gadgil, Origins of the Modern Indian Business Class, Poona: Gokhale Institute of Politics and Economics, mimeo, 1959. 4 An American academic, Daniel H. Buchanan, wrote the first systematic work on ‘capitalistic enterprise’ in India. Buchanan too was fascinated by caste and religion, and believed these to be tools to understand Indian business. In his framework, the Hindu ‘Baniya caste’ was too mercantile to industrialise, the Muslims had not made much of an impact for reasons of their own, and the artisan castes were too poor and tradition-bound. This left the British, and the Parsis who did not share the traditionalism of the Hindus, with an open field. No doubt this analysis influenced American views about India for the next several decades. The Development of Capitalistic Enterprise in India, New York: Macmillan, 1934, cited text appears in p. 146. 5 The precondition was ‘the existence and freedom to operate of a new group of industrial entrepreneurs’, Walt Rostow, ‘The Stages of Economic Growth’, Economic History Review, 12(1), 1959, 1– 16. Many contemporary writers studied India to look for the presence of this condition and considered if it could be bypassed. In the 1950s, they encountered an India where a confident government led industrialisation. Bert F. Hoselitz predicted that a class of ‘manager’ entrepreneurs consisting of public officials would meet the condition in the initial stages of industrialisation, eventually yielding their place to the ‘business’ entrepreneur. See Sociological Aspects of Economic Growth: An Adaptation, Bombay: Vakils, Feffer, Simon, 1960, 59. 6The Marxist characterisation of the capitalists in India during the endgame of the British Empire was caught up in a battle between different factions of the left, particularly, a centre-left who saw Indian big business as a force of nationalism, and a harder left that saw the big business as a reactionary ally of the imperialists. Both agreed that they had played second fiddle to foreign capital during colonial rule. For discussion, see V. I. Pavlov, The Indian Capitalist Class: A Historical Study, Delhi: People’s Publishing House, 1964; Suniti Kumar Ghosh, The Indian Big Bourgeoisie, Calcutta: Subarnarekha, 1985. 7Charles Bettelheim, India Independent, New York: Monthly Review Press, 1968, 73. 8Morris D. Morris, ‘Values as an Obstacle to Economic Growth in South Asia: An Historical Survey’, Journal of Economic History, 27(4), 1967, 588– 607; Dwijendra Tripathi, ‘Occupational Mobility and Industrial Entrepreneurship in India: A Historical Analysis’, Developing Economies, 19(1), 1981, 52– 68; Makrand Mehta, Indian Merchants and Entrepreneurs in Historical Perspective, New Delhi: Academic Foundation, 1991; Dwijendra Tripathi and Makrand Mehta, Business Houses in Western India: A Study in Entrepreneurial Response, 1850– 1956, New Delhi: Manohar, 1990. 9 ‘Indian Entrepreneurship in Historical Perspective: A Re- Interpretation’, Economic and Political Weekly, 6(22), 1971, M59– M66. 10Bipan Chandra, The Rise and Growth of Economic Nationalism in India: Economic Policies of Indian National Leadership, 1880–1905, Delhi: People’s Publishing House, 1966. See also Aditya Mukherjee, Imperialism, Nationalism and the Making of the Indian Capitalist Class, 1920–1947, New Delhi, Thousand Oaks and London: Sage Publications, 2002. 11Bipan Chandra, Aditya Mukherjee, and Mridula Mukherjee, India Since Independence, New Delhi: Penguin, 2008, 18. 12Rajat K. Ray, Industrialization in India: Growth and Conflict in the Private Corporate Sector, 1914–47, Delhi: Oxford University Press, 1979; Amiya Kumar Bagchi, Private Investment in India 1900–1939, Cambridge: Cambridge University Press, 1972. Also on obstacles, Morris D. Morris, ‘The Growth of Large-Scale Industry to 1947’, in Dharma Kumar, ed., The Cambridge Economic History of India, Vol. 2: 1757– 1970, Cambridge: Cambridge University Press, 1983, 551– 676. 13 Thomas Timberg, The Marwaris, Delhi: Vikas, 1973. 14Caste and Capitalism in Colonial India, Berkeley and Los Angeles, 1994. Interestingly, both Timberg and Rudner deal with groups engaged in banking and moneylending, which suggests that bankers were indeed more reliant than others on markers of trust and loyalty, since they handled large sums of money. 15See, for a discussion, Tirthankar Roy, Company of Kinsmen: Enterprise and Community in India 1600–1950, New Delhi: Oxford University Press, 2018. 16 On common identity, an example is Shoji Ito, ‘A Note on the “Business Combine” in India’, The Developing Economies, 4(3), 1966, 367– 80. ‘[T]here existed between the family-firm and the trading community of which it was a member an informal relationship symbolized by a very strong sense of responsibility for the well-being of one’s community fellows and an overt preference for dealing with them’, Andrew F. Brimmer, ‘The Setting of Entrepreneurship in India’, Quarterly Journal of Economics, 69(4), 1955, 553– 76, cited text appears in p. 557. This role of family or family-firm has also been stressed in Helen Lamb, ‘The Indian Business Communities and the Evolution of an Industrialist Class’, Pacific Affairs, 28(2), 1955, 101– 16, and Morris D. Morris, ‘Modern Business Organisation and Labour Administration: Specific Adaptations to Indian Conditions of Risk and Uncertainty, 1850– 1947’, Economic and Political Weekly, 14(40), 1979, 1680– 7. See also, Tirthankar Roy, ‘Capitalism and Community: A Study of the Madurai Sourashtras’, Indian Economic and Social History Review, 34(4), 1997, 437– 64. 17Thomas A. Timberg, ‘Three Types of the Marwari Firm’, in Rajat Ray, ed., Entrepreneurship and Industry in India 1800–1947, New Delhi: Oxford University Press, 1994, illustrates some of these services. 18Mark Granovetter, ‘The Strength of Weak Ties: A Network Theory Revisited’, Sociological Theory, 1, 1983, 201– 33. 19Rajnarayan Chandavarkar, ‘Industrialization in India before 1947: Conventional Approaches and Alternative Perspectives’, Modern Asian Studies, 19(3), 1985, 623– 68. 20 Ibid., cited text on p. 646. 21 Sidney Homer and Richard Sylla, A History of Interest Rates, New Jersey: John Wiley, 2005 (4th ed), 125, 139. 22K. N. Chaudhuri, cited in Irfan Habib, ‘The Eighteenth Century Indian Economic History’, in P. J. Marshall, ed., The Eighteenth Century in Indian History, Delhi: Oxford University Press, 2003, 100– 22. 23Shireen Moosvi, ed., ‘The Indian Economic Experience 1600– 1900: A Quantitative Study’, in Moosvi, People, Taxation and Trade in Mughal India, New Delhi: Oxford University Press, 2008, 1– 34. 24Tirthankar Roy, ‘Factor Markets and the Narrative of Economic Change in India, 1750– 1950’, Continuity and Change, 24(1), 2009, 137– 67. 25George Rosen, ‘The Structure of Interest Rates in India’, Economic Weekly, 1960, 799– 806. 26 The example was the Bank of England that directly served the state and indirectly induced expansion in the capacity of the banking system. This sentence-segment from Weber’s Economy and Society is a favourite of global historians, and is cited by, among others, Christopher Chase- Dunn, and Giovanni Arrighi. See Chase-Dunn, Global Formation, Lanham, MD: Rowman and Littlefield, 1998, 135; Arrighi, The Long Twentieth Century, London and New York: Verso, 1994, 12. 27 Cited in Geoffrey Ingham, ‘Schumpeter and Weber on the Institutions of Capitalism: Solving Swedberg’s “Puzzle’’’, Journal of Classic Sociology, 3(3), 2003, 297– 309. 28Douglass North and Barry Weingast, ‘Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth- Century Britain’, Journal of Economic History, 49(4), 1989, 803– 32; Nathan Sussman and Yishay Yafeh, ‘Institutional Reforms, Financial Development and Sovereign Debt: Britain 1690– 1790’, Journal of Economic History, 66(4), 2006, 906– 35. 29Tirthankar Roy, ‘The Monsoon and the Market for Money in Late- colonial India’, Enterprise and Society, 17(2), 2016, 324– 57. 30 This set of figures combines the volume of goods passing through the major ports around 1800 (Tirthankar Roy, India in the World Economy from Antiquity to the Present, Cambridge: Cambridge University Press, 2012) with the volume of goods carried by the railways and ports in 1940 (India, Statistical Abstract for British India 1930–31 to 1939–40, London: HMSO, 1942, 652– 70, 712). The extent of the growth will be tempered by the quantity of trade lost – or gained – due to decline in overland trade and river-borne trade, because of the railways and ships. We do not know enough on these figures, nor on whether these systems were substitutes of or complementary to the railways and ships. 31Robert Dunn and Jack Hardy, Labor and Textiles: A Study of Cotton and Wool Manufacturing, New York: International Publishers, 1931, 25. 32 BKS, ‘The European Steel Industry: Production Trends and the World Market’, The World Today, 6, 1950, 265– 74. 33 For statement and discussion, see Alice H. Amsden, ‘Diffusion of Development: The Late-Industrializing Model and Greater East Asia’, American Economic Review, 81(2), 1991, 82– 6. Vivek Chibber, Locked in Place: State-Building and Late Industrialization in India, Princeton: Princeton University Press, 2003, contains a summary. 34The state of the art is discussed in Paul Westhead and Mike Wright, Entrepreneurship: A Very Short Introduction, Oxford: Oxford University Press, 2013; Hans Landström and Franz Lohrke, eds., Historical Foundations of Entrepreneurship Research, Cheltenham: Edward Elgar, 2011; Mário Raposo, David Smallbone, Károly Balaton, and Lilla Hortoványi, eds., Entrepreneurship, Growth, and Economic Development, Cheltenham: Edward Edgar, 2011. 35Christopher Brown and Mark Thornton, ‘How Entrepreneurship Theory Created Economics’, Quarterly Journal of Austrian Economics, 16(4), 2013, 401– 19. 36Israel M. Kirzner, ‘Equilibrium versus Market Process’, in Edwin G. Dolan, ed., The Foundations of Modern Austrian Economics, Kansas City: Sheed & Ward, 1976. 37Max Weber, The Protestant Ethic and the Spirit of Capitalism (Tr. Talcott Parsons, edited by Anthony Giddens), Abingdon and New York: Routledge, 2001, 30– 1 (for this and subsequent citations in this paragraph). My reading of Weber is influenced by Richard Swedberg, ‘The Economic Sociology of Capitalism: Weber and Schumpeter’, Journal of Classic Sociology, 2(3), 2002, 227– 55. 38Ingham, ‘Schumpeter and Weber on the Institutions of Capitalism: Solving Swedberg’s “Puzzle’’’ 39Lord Robbins, The Theory of Economic Development in the History of Economic Thought, London and Basingstoke: Macmillan, 1970, 16. 40 Michael C. Jensen and William H. Meckling, ‘Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure’, Journal of Financial Economicse, 3(4), 1976, 305– 60. 41Michael J. Barclay and Clifford G. Holderness, ‘Private Benefits from Control of Public Corporations’, Journal of Financial Economics, 25(2), 1989, 371– 95. 42Andrei Shleifer and Robert W. Vishny, ‘Large Shareholders and Corporate Control’, Journal of Political Economy, 94(3), 1986, 461– 88. 43Raghuram Rajan and Luigi Zingales, ‘Financial Dependence and Growth’, American Economic Review, 88(3), 1998, 559– 86; Ross Levine, ‘Finance and Growth: Theory and Evidence’, in Philippe Aghion and Steven Durlauf, eds., Handbook of Economic Growth, Vol. 1, Amsterdam: Elsevier, 2005, 865– 934. 44Tarun Khanna and Yishay Yafeh, ‘Business Groups in Emerging Markets: Paragons or Parasites’, Journal of Economic Literature, 45(2), 2007, 331– 72; Pankaj Ghemawat and Tarun Khanna, ‘The Nature of Diversified Business Groups: A Research Design and Two Case Studies’, Journal of Industrial Economics, 46(1), 1998, 35– 61; Tarun Khanna and Krishna Palepu, ‘Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups’, Journal of Finance, 55(2), 2000, 867– 91. 45 Surajit Mazumdar, ‘The Indian Corporate Structure and the “Theory” of Emerging Market Business Groups’, History and Sociology of South Asia, 6(2), 2012, 87– 109.  2 The Baseline at 1700 ◈ The Indian subcontinent is geographically diverse. A big part of it consists of the Indo-Gangetic Basin formed of the floodplains of two huge Himalayan river systems, the Ganges and the Indus (Map 2.1). The Basin has fertile land that in the past sustained cities, armies, trade, crafts, and states. Elsewhere, agricultural conditions were poorer. But the long coastline contained settlements of traders who conducted a lot of maritime trade around and near the Bay of Bengal, especially the Arabian Sea. Such settlements also occurred in the arid fringes of the western deserts, through which important overland trade routes passed. Around 1700, this composite land was ruled by the Mughal Empire (1526– c. 1720) in the Indo-Gangetic Basin, and by smaller states and semi-independent vassals of the Mughals nearer the coast. Although the Empire did possess ports, overall, it had weak penetration into the coastal areas and into the seas.  Map 2.1 South Asia: Geographical features Therefore, two quite different types of capitalism functioned side by side, with limited interactions between them. One of these formed along the coasts, lived on maritime trade, and was sponsored by the coastal states. The other one formed in the interior, and served overland trade. The main geographical space for land trade was the Indo-Gangetic Basin. Relatively flat terrain, wheeled traffic, navigable rivers, and cities that were home to wealthy consumers, sustained land trade. Where river traffic ended, caravans began. Bullock caravans linked the Indo-Gangetic Basin with the Deccan Plateau where wheeled and river transport were less developed. Small pack animals crossed the Himalayas to link other parts of land-locked Asia with India. The Empire ruled from northern regions in the Indo- Gangetic Basin. The Empire possessed ports like Surat or Hooghly, but the coast was mainly ruled by smaller local states. Although these two complexes intersected to some extent, they involved different groups of merchants, different goods, different clients, different sponsors, and possibly, different organisation. Land trade carried grain, silk, textiles, wool, horses, precious stones, and other luxury articles consumed by the military-political elite of the Mughal cities. Sea trade carried mainly cotton textiles. Land trade and the financing of land trade involved communities, such as the Khatris and Marwaris, who did not have a significant presence in the ports. The sea trade involved communities, such as the Kachchhis, Tamil-speaking Muslim merchant groups like the Marakkayars and the Labbais, the Parsis after 1700, and several European trading firms and merchants, who had limited interest in the goods traded in the interior, and did not usually settle in the interior. The main clients of land trade were the residents of the towns of northern India. The main clients of sea trade were in West Asia, Africa, Southeast Asia, and increasingly in the 1700s, Europe. The fact that sea trade was more cosmopolitan and less state-dependent – that is, less tied to the revenue system – should make for fundamental differences in the nature of the firms and their institutional forms, but there is little information available on these differences.  The two business worlds had weak interaction between them. Several factors kept these complexes separate and parallel. One of these was high trade and transportation cost. Recent scholarship has established that trade costs were (relative to Europe) high in India before the railways started in the second half of the 1800s.1 Another was politics. The Mughal state, by establishing peace over the vast Indo-Gangetic plains, integrated markets in this zone. Directly it gave many overland traders and town bankers the chance to make money from moving grain or converting grain into cash revenue. The sea was of marginal importance to the Mughals as a source of revenue. It gave them a convenient income and an access to silver, but it was not vital to their survival. The Mughal provinces with extensive sea trade, Bengal and Gujarat, were far enough away from the political centre in Delhi and Agra to maintain a partial autonomy. This separation between land and sea trades began to end from the 1700s. European merchant firms like the British and the Dutch East India Companies arrived on the Indian coasts in the early 1600s; by the end of the 1600s, they were entrenched there, and in the next century, were joining politics in the interior world and trading in goods produced in the interior. While the next chapter discusses the integration between the two worlds, this chapter describes the two worlds themselves. Merchants and Bankers in Land Trade In the relatively urban Indo-Gangetic Basin, merchant settlements were established in almost every town. Merchants owned boats and transported a variety of goods along the major rivers. Three big long-distance channels of trade involved movements of Bengal silk to North India, grains by bullock caravans from the Indo-Gangetic Basin to the coasts, and cotton from central and southern India to the textile-producing areas. Sushil Chaudhury suggests that the Asian merchants who organised overland trade in the Ganges-Jumna plains exported a lot of the artisanal goods from this region in the late 1700s.2 In the major cities of the Mughal Empire, large banking firms accepted deposits, and did business deals with the military and political elite.3 Frustratingly little information is available on the names, business practices, and histories of these firms. Mughal nobles ‘themselves at times took a substantial interest in trade’.4 Three Governors of Bengal, Mir Jumla, Shaista Khan, and Azimush-Shan, invested in trade, directly or through other merchants. The Europeans needed to negotiate with them commercial taxes and access to supplies.5 Besides these exceptional warlord-merchants, there were of course many merchants and bankers. But we have little concrete information on the firms that they owned. Instead of firms, we encounter Indian merchants as communities. The Punjabi Khatris were one such community. A steady migration of Khatri individuals into Bengal followed the Mughal invasion of the region (c. 1595). They resettled as court officers, military officers, and landholders under some of the larger estates, known as jagirs. The merchant-cum- banker Amirchand or Umichand, one of the East India Company’s principal agents in the 1750s, was of Khatri origin.6 In the mid-nineteenth century, Khatris were prominent in Calcutta as brokers and agents of European firms, though some of them were soon to be replaced by the Marwaris in that role.7  If the Khatri migration began from their position as partners of the Mughal Empire, Marwari migration followed a more commercial logic. Marwar stands for the Jodhpur region (a district and a former princely state of the same name, see Map 2.2) located in southwestern Rajasthan, western India. Marwari refers to a language spoken in Jodhpur and its neighbourhood, and in turn, the people who speak the language. Capitalists held important places in the courts of the princely states in this region. From this origin, the Oswal bankers, an endogamous commercial caste (jati) of this area, dispersed throughout northern India, being ‘known under one denomination, Marwari’.8 Outside the Marwar region, the term ‘Marwari’ included more than a dozen endogamous groups, the most prominent among them being Agarwal, Khandelwal, Srimali, Maheshwari, Jaiswal, and Oswal.  Map 2.2 British India (shaded) and princely states around 1900 Several of these merchant lineages were concentrated in the arid desert fringe. The region produced few goods of value to commerce, but was important to trade and banking. In the seventeenth century, when two powerful empires, the Mughal (1526– c. 1720) and the Safavid (1501– 1722), ruled Southern Asia, Jodhpur town was at the intersection of two overland trade routes of great importance. These were the road between the Mughal capital Agra and Kandahar, a border town occupied by the Mughals and the Safavids at different times, and the road between Ahmedabad and Agra. These roads joined trade traffic along the river Indus and its tributaries. The economic rise of the trading communities from the desert fringe was connected to the prosperity of these territorial empires. In turn, individual Marwaris occasionally joined the Mughal court. One example was Todar Mal, the Emperor Akbar’s minister and the supervisor of the first large-scale land survey. These courtier-merchants also owned landed estates, and a few even joined battles, but such cases were exceptional. Marwaris were close to the regional Rajput states in the seventeenth century, most of which were vassals of the Mughals. Merchants and bankers were frequently recruited into high offices by the Rajput states, as the nineteenth-century European officers-cum-chroniclers James Tod and Alexander Forbes reported. In Phalodi, on the western border of Jodhpur, a seventeenth-century merchant had built a city state.9 Outside Rajasthan, the major polities of northern India offered the traders legal autonomy and immunity, so they started to circulate over a large region. The Pax Mughaliana was an impetus to go further afield in search of such custom. Like the Khatris, a few Marwari firms followed Mughal territorial expansion eastward in around 1600 and resettled in eastern India. We do not know enough about the nature of their businesses, but silk textiles and banking were very likely included in the list, for Marwari firms were prominent in both these fields in the eighteenth century. There were, however, few known cases of Marwari relocation and resettlement outside northern India in these centuries. The riparian highways linked seaports like Surat and Hooghly with the Punjab, where trans-Himalayan caravans descended in winter bringing goods from Central and West Asia for sale in fairs. Only small pack animals could negotiate the mountain passes, so the traders did not have high carrying capacity. It was also entirely seasonal. Typically, the traders carried low-bulk, high-value articles, such as silk and wool.10 Trade in this setup was sometimes linked to sheep rearing. In such cases, the traders were formed of groups distinct from the merchants who operated in the plains. In the Deccan Plateau, where roads were few and navigable rivers rare, the main mode of transportation of cargo was the bullock caravan. Unlike the trans-Himalayan caravans, bullock trains carried bulk goods like grain or cotton. But like the trans-Himalayan caravans, the caravan runners in the Deccan were not usually merchants. Among the merchants who owned warehouses and establishments in the market towns, the caste names that represented caravan runners were rare. The comparative advantage that the latter possessed lay elsewhere than in trade. It consisted of the knowledge of routes and of how to maintain livestock. Caravan routes started from market points located on the Ganges (like Mirzapur) and the Indus and went towards central, western, and southern India. The transporters known as Banjaras or Lambadas managed these caravans. When the North Indian Sultanate spread its power southward in the fifteenth century, the caravans find mention. Especially during military campaigns in the Deccan, armies relied on caravans, and therefore sources on warfare tend to be informative on the organisation of the caravans.11 Towns in the Indo-Gangetic Basin contained many artisans. Some of the master artisans may have acted also as merchants, certainly as employers, but few details are available on this form of enterprise. Some of the most skilled forms of craft work took place in a type of unit called karkhana. The word karkhana, common to many Indian languages, derives from Persian. In its original Indianised meaning, karkhana was ‘a place where business is done’.12 More often, the place was a workshop or a warehouse. Any workshop would not qualify to be called a karkhana. The word would ordinarily mean a large-scale craft production workshop employing wage labour. In that respect, karkhana was the pre-modern factory. Court officers and European travellers in the Mughal Empire described several large establishments like these in the cities. A common feature of these workshops was that they were owned or sponsored by the court officers. Since these officers formed a part of the consumer class, I would call this setup consumer-owned. In the nineteenth and twentieth century, we again encounter the term ‘karkhana’, in the Punjab carpet and shawl industries, for example. But now they were owned by merchants. In the mid-twentieth century, a cluster of textile-producing factories in the southern Maharashtra region (especially Sholapur) was also called karkhana. Most of them were owned by artisans. We cannot say how these three general types – consumer-owned, merchant-owned, and artisan-owned – were related, or whether they were related at all except by the generic name that attaches to all three. The karkhana of the Mughal cities was mainly the consumer-owned type. Outside these units, there were surely households and workshops producing goods for the wider market, and surely these two worlds transacted between them. But we know little on that market-oriented artisanal sphere. The Mughal court officer in 1595, Abu’l-Fazl, said that town administration had a say in the appointment of guilds and guild masters.13 These guilds worked together with the karkhana. The cities had a whole hierarchy of these, most of them owned by courtiers and individuals close to the court. At the very top, of course, was the imperial karkhana.14 Any visitor to the Agra Fort today would marvel at the scale of the place. It was not merely a fort, but a fortified city. Being such, it needed stores and factories to locate inside the fort. This was the milieu where the royal karkhana operated. Although Abu’l-Fazl mentioned ‘guild’, guilds in the north European sense – that is, associations bound by their own laws and independent of the state – were not common in this milieu. Most likely, they did not need to exist: the karkhana was powerful enough because its patron was a powerful individual. In one respect, however, the karkhana may indeed have resembled a guild. The goods made in the karkhana were rich in craftsmanship, and training was a very important matter. It is likely that guild-like rules existed to regulate the progression of ordinary artisans to master artisans. Again, little is known of the individuals who worked in these places for us to be more specific on how skills were formed and preserved. Compared with the land sphere, the sea sphere was distinct in several ways, one of which was that it was more cosmopolitan. Merchants in Sea Trade The Arabian Sea has a special place in Indian business history. For centuries, the cities and settlements on the Arabian Sea littoral traded with each other, exchanging Indian textiles for horses, armaments, pearls, and ivory. In turn, some of the textiles were passed on to the Atlantic slave trade in Africa as a medium of exchange, or sent overland to European markets. Coastal merchants indigenous to the region bordering the Sea engaged in this business and developed sophisticated systems of banking and ship- building to support the mercantile enterprise. The Hindu and Muslim traders of Kachchh were examples of such people. In the seventeenth century, the Arabian Sea trade flourished thanks to the control that three powerful empires – the Ottoman in Turkey, the Safavid in Iran, and the Mughal in India – exercised on some of the key seaports. Transactions between these empires initiated a golden age of Arabian Sea trade. Much less systematic information exists on the Bay of Bengal trade (see next). In 1498, a Portuguese mariner named Vasco da Gama reached Calicut, a seaport on the Malabar coast. He was the first European mariner to complete the journey from Europe to India via the Cape of Good Hope. By doing so, he demonstrated that it was possible for western European merchants to reach India without having to travel overland in West Asia. That route, being controlled by the Ottoman Empire and the Venetian and Genovese merchants, was not found safe enough by western Europeans. In the next one hundred years, first the Portuguese and later the English and the Dutch established trade links between Europe and Asia. In the late seventeenth century, other nations joined the contest for a share in Indian Ocean trade. The records left by these traders revealed a rich world of trade in the seaboard societies, including the chief port Surat. An earlier scholarship saw this world as a kind of satellite to European trade.15 That view has been revised in favour of one that sees it as a trading system in its own right, quite different from the one that existed in Agra or Delhi, and one that integrated India with West Asia, East Africa, Southeast Asia, and China.16 Europeans came here because they were attracted by the goods already traded in Asia. Systematic knowledge of business enterprise remains biased towards those segments where European traders had direct or indirect interest. This is so because many European traders operated as employees of joint-stock companies, and these companies needed to keep more documents for the benefit of the head office than the Indian family firms who operated in these zones. Thus, the Arabian Sea trade and the Coromandel trade are better researched than the northern and eastern half of the Bay of Bengal, which joined the Bengal Delta with Burma, Indonesia, the Malaya, and further, with China, and where European traders did not usually go, but many Asians did. Equally less known is the trans-Himalayan overland trade that joined the Bay of Bengal trade with northeast India and East Asia. New books shed light on trade history in these zones, but the field still lacks information on the individuals and firms that conducted their trades here.17 Europeans who lived in Surat reported that there were substantial merchants in the town, who owned ships, carried valuable cargo, employed their own staff, and often received special treatment at the ports. A Bohra merchant Mulla Abdul Ghafur, and two Jain merchants, Virji Vora (c. 1585– 1670) and Shantidas Jhaveri (c. 1580– 1659) appear frequently in early English documentation from Surat. Their interests encompassed trade, shipping, and banking. These sources comment more about their political weight than about their business practices. Jhaveri became infamous for the hand he played in the religious politics of the sect, which prompted one historian to say that ‘the Jain monks needed the businessmen as much as the businessmen needed them’.18 European accounts show further that these firms gained from lending money to the Europeans, and occasionally forcing them to trade with them or trade in the Arabian Sea on their behalf. Somewhat smaller in scale were the merchants who did not own ships and often worked as agents of the principal merchants. Below them were many small-scale merchants who carried generic cargo. Shipping was an important marker in this hierarchy. The conjunction of trade and shipping made the magnates at the top either partners or rivals of the European firms. One of the reasons for the vitality of Indian shipping was that it charged lower freight rates than the European ships in the routes that it was familiar with. However, there were not many merchant firms that owned ships, and shipping was not a popular field of investment. It was not, possibly because the ships were individually owned, and while insurance covered the goods, it did not cover the ships. Compared with Surat, less attention has fallen on Kachchh further north, which conducted a lot of trade in the Arabian Sea. Kachchh is a region with unique qualities. Although poorly endowed with agricultural resources, it has a convenient situation on a navigable part of the eastern Arabian Sea. The ancient Mandvi port bears witness to this importance. Another factor was politics. The western coastal regions were ruled by small states that depended heavily on income from trade. This dependence was owing to the poor agricultural conditions in the region, or more directly, to the fact that marine transport costs were much lower than land transport costs. In turn, these states, though nominally vassals of the Mughals, could exercise a great deal of independence in policy. They used their freedom to create a model of rule where merchants and bankers had a prominent place in local politics, not only during warfare, the all-too- common palace intrigues, or natural disasters, but also in normal times. Merchants and bankers helped the business of governance. They collected taxes, did revenue farming, made loans, and took part in administration, whereas the states helped them by offering lucrative contracts and implicitly recognising their internal laws and practices.  The merchant groups in question established diaspora networks in port cities around the Arabian Sea. They conducted complicated financial operations including bills of exchange (hundis) and insurance, and their bills were accepted in the distant trading points thanks to the diaspora network. Vaishnavite temples and monasteries effectively became banks, clearing houses, and guarantors of reputation. Community law had great force. The merchants had considerable interest in ship-building, which in turn encouraged the timber trade. In banking, trading, ship-building, and navigation, master– apprentice hierarchies were highly developed, showing how much skills were valued and how skills formed.19 European entry into this world occurred in sporadic ways in the 1500s. By 1650, Europeans were important actors in the coastal world. And they represented a different type of firm from the Indian ones. European Merchants Soon after da Gama discovered the sea route to southern India, other Portuguese mariners reached the Indian Ocean with the intention of taking control over the Indonesian spice trade. The move led to several well- defended settlements to appear on the coasts of Konkan, Persia, the Arab peninsula, East Africa, and Malacca in the Malay Peninsula. Portuguese efforts to license or collect protection money from shipping on the long route