Entrepreneurship & Industry in India PDF

ENTREPRENEURSHIP AND INDUSTRY IN INDIA: INTRODUCTION pp. 1-69 by Rajat Ray INTRODUCTION 1. The roots of in...

ENTREPRENEURSHIP AND INDUSTRY IN INDIA: INTRODUCTION pp. 1-69 by Rajat Ray INTRODUCTION 1. The roots of industrial capital in the new state of India and Pakistan have been traced to the older merchant communities embedded in the time honoured caste system. The top 20 industrial houses in India, at least until the 1980s, derived mainly from the merchant communities especially the Marwaris. In Pakistan too, many of the 22 families which reputedly own half the nation’s wealth are the Cutchi (Katchhi) Memons, i.e. Memons from Katchh region, the preeminent trading caste among the Muslims of undivided India. Yet the widespread involvement of these merchant communities in modern industry is a phenomenon that goes back no earlier than the 1st World War. 2. Before that [i.e. before WW1,] the world of bazaar, in which the indigenous bankers and traders operated, was sharply distinct from the world of modern business and industry, which was predominantly European and generally located on the coast. 3. Although, in the late 19th century an Indian-owned complex of modern industry had sprung up in Bombay and Ahmedabad –but this was an exception. The tea plantations, the coal mines, the jute mills etc. had developed in eastern India under European enterprise, roughly between 1850s and 1880s. 4. The merchant community of the interior were engaged at that time in quite a different set of activities – a. the marketing of agricultural produce, b. the financing of inland trade in commodities, c. the facilitation of movement of artisan products, and peasant crops etc. 5. They did this by means of the inland bill of exchange, known as the hundi and by the indigenous form of commission agency known as the arhat. 6. These operations in the bazaar enabled bankers and merchants to a. Accumulate Capital b. To forge long distance connections in the inland market. c. Such connections were to prove crucial when they went into industry beginning from the outbreak of the 1st WW to the advent of independence. 7. [The question before us is – why did the Indian businesses, with the exception of Bombay and Ahmedabad not enter modern Industry before WW1?] 8. The first major research work on the growth of private enterprise in India was Daniel Houston Buchanan’s The Development of Capitalist Enterprise in India (New York, 1934). a. In his view, the spirit of enterprise was inhibited amongst the indigenous population of India by the religious philosophy of resignation embodied in the 1  doctrine of karma and rigid social and economic system characterized by caste, purdah and the joint family. b. It appeared to him that a mixed non-indigenous group, either Europeans or persons from outside the native Indian population, especially the Parsis, were the leaders of industrial movement. 9. Contemporary Indian opinion differed significantly from Buchanan’s view. a. D. R. Gadgil in ‘The Industrial Evolution of India in Recent Times’ (first published in 1924), emphasized the economic factors inhibiting more rapid industrial development especially the difficulties of capital mobilization on account of absolute smallness of resources in respect to the size of the population etc. b. At the same time Gadgil was not oblivious of the social factors that went into making of the Indian capitalist class. 10. Thus there is no gainsaying, that the tight organizations, such as a commercial community that characterized such groups as the Europeans, the Marwaris and the Parsis, certainly helped the members of those communities to compete on more than equal terms with the rest of the population. 11. But at the same time, one should be wary of the tendency to regard the Europeans or the Parsis as inherently more dynamic by virtue of either race, or superior social customs, or some sort of protestant religious-cultural ethos. a. Rajat Ray points out that – i. had a Protestant-ethic been the only factor, the ‘progressive-minded’ English-educated Bengalis, after their initial ventures in collaboration with the Europeans would not have faded out after 1848; ii. nor would the Marwaris, an intensely conservative community, have emerged thereafter as the most successful group in Calcutta. b. More importantly, as Ashok V. Desai’s work of Parsis indicates - it was not so much their ‘Protestant ethic’ as the strategic position they had carved out for themselves early on in Bombay, by virtue of acting as collaborators (‘the comprador role’) of the Europeans in the China trade. 12. As for the Europeans, a. Amrtya Sen emphasizes ties at home held them back from pioneering the cotton textile and the steel industry; and b. Amiya Kumar Bagchi underscores the systematic advantage they gained vis-à-vis their Indian competitors by means of cartels as well as by virtue of racially discriminating policies of the Government of India. 13. However, others, including Morris de Morris and B. R. Tomlinson, do not agree with this. Among other points they seek to emphasize the strictly business considerations that guided the investment behaviour of European businessmen in India. 14. On such hotly debated issues, a consensus is yet to emerge, especially as regards the impact of British capital and British government on the development (or underdevelopment) of Indian industry. 2  a. One line of thinking associates the distorted pattern of India’s industrial evolution with the colonial factor. b. The other [line of thinking] minimizes it and seeks explanation in the low level of the Indian economy. 15. The first line of thinking, reflected in the writings of authors such as R. S. Rungta, Amiya Kumar Bagchi and Rajat Ray (and perhaps more recently Prassanan Parthasarthi), amongst other things, a. Dwells on the laissez faire economics of the Raj and the missed opportunity of industrialization in the 19th century (R.S. Rungta). b. Bagchi points out in his Private Investment in India 1900-1939, that the structure was shaken up after 1914, and opened the way to limited degree of industrialization under Indian initiative in the 1920s and 1930s. c. Rajat Ray, Industrialization in India, stresses on the new ventures undertaken by industrialists freshly risen from the bazaar, as well as the opportunity they missed in heavy industries during the 2nd WW on account of the government obstructions. 16. As opposed to this line of thinking, Morris de Morris and more recently Tirthankar Roy and others have emphasized upon a. The poorer resource endowment and the technological backwardness of the Indian economic structure as the major factors blocking the sustained growth of large scale industry. b. By implication Morris challenges Bagchi’s contention about the inhibitive impact of colonial economic interests on levels of investment in India. 17. By common consent, however, the explanation of the backwardness is no longer sought in the otherworldly values of Indian civilization, the religious ethic or the institution of caste. In other words, instead of resorting to uncritical generalizations about values and customs, economic historians now pay closer attention to demand and supply factors. 18. This research has thrown up a series of questions regarding the history of industry in India, such as: a. Why did the linking of Indian capital to industry came so late? b. How was the sophisticated world of Bazaar shut out from the European preserve of modern banks, export-import houses, factories and plantations? c. What benefits did these European enterprise confer on the country in terms of economic growth, etc. 19. According to Rajat Ray, such questions are closely related to the basic question – why was the Indian enterprise unable to effect an industrial revolution. a. Was it, as Morris argues, too backward around 1800 for it to ‘take off’ in the 19 th century? b. Or did underdevelopment ‘develop’ in India as a result of ‘deindustrialization’ in the course of the 19th century? 3  TRENDS IN INDUSTRIAL PRODUCTION AND EMPLOYMENT & THE DEINDUSTRIALIZATION DEBATE 1. It may be noted here that the current chapter is concerned with the modern industry alone. Artisan manufacture, which remained outside the sphere in which industrial capital operated remains outside the purview of the chapter. 2. For the statistical evidence available on employment in the secondary sector of the economy seems to indicate that despite the emergence of factories and mines, the proportion of population dependent on industry declined significantly in the course of the 19th century. 3. According to Rajat Ray, the emergence of modern industry did not offset the decline in the traditional industry. a. Furthermore, there is evidence to show that this deindustrialization was arrested before or around the beginning of the 20th century. b. Modern manufactures expanded fast in the 1880s and 1890s going up from Rs. 282 million in 1882 to 870 million in 1889 at constant prices. c. Not merely did the factories begin to multiply from around 1900 (and sometime before this) the output of artisan industries also went through slow rate of increase (More about this in the chapter by T. Roy on Small Scale industry). 4. Until the outbreak of the 2nd WW, however, artisan output was greater than factory output – a fact that set India apart from the industrial countries. a. Since artisan output increased at no more than 1.2% between 1900 and 1946, the overall income from the secondary sector increased at the rate of 3.5% per annum. b. This was not a fast enough rate to set India on the path of industrial revolution despite the apparently rapid growth of the modern industry between the two world wars. 5. Hence to some extent, the question here is not so much about when artisan production declined and by how much, The question is a. why did the modern industry begin so late and so slowly? b. Why was there a large time gap between the European debut of the industry and the Indian debut of the industry? 6. If we look at the growth of modern manufacturing in isolation, it gives a misleading inflated impression of growth, for it was a predominantly agricultural and artisanal economy in which large-scale mining and manufacturing accounted for a small proportion of the net domestic product (NDP) right down to the outbreak of the 2 nd WW. a. While seen in isolation, the large scale industry did well from its inception in mid 19th century to improve not only over the two WWs but also during the depression year. 4  b. But the factory production was so small a portion of the NDP that the increase did not produce any visible impact on the occupation structure of the economy. c. For the first half of the 20th century when the development of modern industry was a seemingly impressive phenomenon it is a little curious to observe the continuation of the downward trends in the percentage of workers, both male and female employed in manufacturing d. On the other hand, in the case of National Income (NDP), the share of Small Scale Industry (SSI),as it is evident from the table 2.1 below, was more than the large scale industry (LSI) before the 2nd WW but superseded it by the end of the war. Table 1: NDP of India between 1939 and 1946 (at 1946 prices) (Rs. Million) 1939-40 1945-46 Agriculture, animal husbandry, forestry and fishing 34780 34712 Mining and large scale manufacturing 4360 6599 Small and Cottage industries 6102 5665 Net Product 62325 69272 7. Industry’s contribution to NDP increased from 1900 to 1946. This was due to the better performance of the modern industry. Modern industry grew rapidly at the time when artisan manufacturing was slow to expand. Table 3: Product from Three Sectors (at 1938 prices) (in Rs. million) 1900-01 1938-39 1946-47- 1. Primary (crops, livestock, forestry, fishing) 9318 10721 11350 2. Secondary (LSI, SSI, mining) 1638 3960 4307 3. Tertiary (Services, professions, house property) 3319 8423 9571 4. Total Product 14046 22625 25210 8. Given the case that even though employment was declining, the output in the industry was not, it would be difficult to say that ‘deindustrialization’ continued in the 20th century. 9. Thus, according to Rajat Ray, deindustrialization in the 19th century was followed in the 20th century by a mixed type of industrial development: a. A significant rise in output of factory industry (output per employee rose from an index of 100 in 1900 to 149.7 in 1947 – i.e. a 50% rise in less than 50 years), and b. A not so sharp increase of employment in factories (from 0.6 million in 1901 to 2.9 million in 1951). Its noteworthy that although in percentage terms the rise is impressive, (almost 500% increase), however, given that the Indian population 5  was slightly more than 360 million in 1951, the percentage of factory workers is less than 1% (0.8%). 10. A slow expansion in total output of artisans (their numbers decreased from 12.6 million to 11.4 million between 1901 and 1951, but per head output went up according to S. Sivasubramonian, from an index of 100 to 168.5). a. This was a limited kind of industrialization. Nevertheless, India in 1947 came to possess a large industrial complex by third world standards. b. Moreover, the greater part of that complex was already in the hands of a strong indigenous capitalist class. THE BAZAAR 1. According to Rajat Ray, the standard classification of primary, secondary and tertiary sectors was hardly suitable for an agrarian country like India. a. Unlike the industrial countries, India derived most of its National Income from handicrafts than from factories until almost the end of the 2nd WW. b. Since the artisan crafts were an integral part of the peasant economy it will not do to lump the modern industrial sector and the older handicraft sector together into a single ‘secondary sector’, as against the ‘primary sector’ of agriculture. c. The household economy of the peasant and artisans constituted a world of its own, standing apart, from the much smaller modern industrial complex that had been enclaved into the Indian economy by British enterprise. d. To single out the Western style concerns alone as the ‘organized’ sector and to put the rest of the economy into an undifferentiated, unorganized and static mass of traditional concerns would be to miss the complexity and sophistication of the indigenous part of the economy. e. The ‘Bazaar’ had its own institutions and indigenous forms of organization and though these did not correspond to western models, they were capable of adapting to changing conditions. 2. In other words the agricultural cum artisan economy – the bazaar - was a complex and sophisticated, with its own institutions and dynamism. It was from this bazaar that the Indian industrial capitalist emerged in the late 19th century. 3. Thus, it would be fruitful to identify the exact position of the bazaar in the economy- a. Let us begin with the fact that there was no unified money market in India. It was divided into 3 sections governed by different rates: i. Rates charged by Western-style banks ii. Fluctuating bazaar rates at which traders borrowed bankers upon hundies iii. The much higher rates charged by moneylenders on peasants and artists. 6  b. According to the data available with Punjab government, in one instance: in Simla in 1875, the rates reported were as follows i. Alliance Bank of Simla – 12% ii. Native bankers to native traders – 6%-12% iii. Money lent to agriculturists – 12%-18% c. It appears rates prevailing in the bazaar were not necessarily, higher than those quoted by banks. There was a large amount of loanable money in the bazaar, so the indigenous banker could often underquote the bank rate. 4. Thus, the bazaar was no primitive pedlar’s world, as compared to the world of banks and corporation. a. The bazaar banks also dealt in mobile credit, i.e. negotiable paper which circulated in the market. b. This was not the case with ordinary moneylenders lending to peasant and artisans: they dealt only in non-transferable book credits, not in negotiable paper. c. The indigenous money market financed inland commission agents, known as arhatiyas through whose interlocking commission agencies all movements of marketed produce took place within the country: in fact, the larger commission agents were themselves bankers. d. By the mid 1860s the hundi network was well integrated, with twin headquarters in Bombay and Calcutta. 5. The 19th century Indian economy , may be said to have consisted of 3 distinct social agglomerations: a. A Westernized enclave of banks, factories, mines, plantations, corporations, managing agencies and import-export firms with weak linkages to the rest of the economy b. The Bazaar, a well integrated complex of shroffs, arhatiyas and wholesale merchants, operating in inland trade through negotiable instruments of credit (hundis); c. The subsistence economy of peasants, artisans and petty deals who had no access to banks or hundi credit, and who were therefore compelled to rely on usurious loans from moneylenders. 6. It is important to remember that credit did not move from one complex to the next in a sufficiently large volume (the reason why the prevailing rates of money in each area were so radically different). 7. Rajat Ray believes that the above stated, three-fold redrawing of the economic contours of Indian society originated from two related processes a. The capture of the commanding heights of the Indian economy by British capital, especially the control of imports, exports, shipping and of the large scale manufacturing activities that fed the flow of processed and exported agricultural produce. 7  b. The mutually beneficial adjustment reached by the European corporations with the inland merchants, commission agents, and bazaar bankers, on whom the former relied for obtaining produce from inland, and for distributing imported goods in the interior. 8. According to Rajat Ray, under the above scheme of things, the bazaar operators, the shroffs and the arhatiyas submitted to the regime of the worldwide economic and political empire but they did so, in a certain measure, on their own terms. a. However the bazaar operators understood that under the new scheme of things, the upper tier was reserved for the European banks, shipping line and managing agency houses and they were relegated to the intermediate tier of the economy. b. The new generation of shroffs and arahatiyas was a completely reshaped fragment of the country’s indigenous commercial traditions, the shape of the fragment being determined by the contours of the colonial economy into which they were pressed by the colonial regime. i. The hundi nexus, despite its antiquity, was no longer the same as the one Travernier had witnessed in the 17thcentury -extending one arm from Surat to Bantem (Java), the second to Mocha (Red sea) and a third stretching inland from Surat to Agra and onwards to Dacca. ii. The new hundi network stretched along the tracks of railways, moving inwards from Bombay at one end and from Calcutta at the other. iii. As the British unified the currency system on the basis of the uniform silver rupee in 1835, and organized their own treasuries supplying bills, bazaar bankers lost the privileged position they had earlier enjoyed as money changers, remittance agents and treasurers to the English East India Company, and to the rival princes of the 18th century. c. Shorn of the earlier charges of insurance and coin exchange, the hundi was transformed, into a pure bill of exchange in the inland trade. 9. The merchant communities operating within the redefined nexus of the bazaar were no longer “traditional” in the true sense of the term. Most older firms collapsed and newer unrelated firms took their place. a. Among the new merchant communities the Parsis, Bhatias, Khojas and Memons from various parts of Gujarat, Cutch (Katchh) and Kathiawar, Multanis from Shikarpur (Sindh), Marwaris from Shekhawati, Bikaner, Marwar, Jaisalmer and the Nattukottai Chettiars from Chettinad tract in Tamil country. b. As auxiliaries of imperial concerns, the most adventurous amongst these merchants communities forged new business concerns abroad: the Parsis to China, the Nattukottai Chettiars to Burma and the Straits Settlements [Southeast Asia], the Bhatias, Khoja’s and Memons to the Middle East and East Africa. 10. Rajat Ray says, that the limitations and success of Indian merchant communities arose from their position within the imperial economic system. After being excluded from the higher tier (reserved for the Europeans), within the sphere defined for them, there sprang up large Gujarati and Marwari family firms with extensive networks linked to 8  railways and telegraphs – two technological innovations that fundamentally altered the conditions of trade within the country. BACKGROUND OF THE LARGE FAMILY FIRMS OF THE BAZAAR 1. An interesting question to ask at this stage would be – What were the large family firms of the bazaar doing before they entered industry? 2. It seems that the leading bazaar firms, that led their way into the close preserves of European industry after the 1st WW, had been actively engaged, since the last years of the 19th century, in a wide range of trading and speculative activities. Such activities enabled them to accumulate the capital which they were later to employ in corporate industrial ventures. 3. Thomas Timberg identifies 3 types of Marwari firms a. The great Banking House b. The brokerage firms attached to large European House c. The venturesome speculator who might later become an industrialist 4. The house of Hukumchand and Swarupchand is a well know example. a. Seth Hukumchand, who made his pile by daring opium speculations in 1901-10, purchased opium from various places in Malwa at ₹2,000 a unit and sent on to Shanghai and other places in China, selling at ₹10,000 a unit. b. Soon after the opium trade ceased due British agreement with China, he adroitly switched to the Indian spot and forward market in cotton, trading very largely in cotton sattas (futures) and speculated on the violent fluctuations in trade. c. Having accumulated his capital in this manner, he set up the first Indian jute mill in Calcutta in 1917. i. Because of the people’s previous experience of large profits from investments in his ventures he had no problems in raising capital for the mill. ii. When he offered the shares of the [Calcutta] mill at Indore, there was a great excitement in town and he had to stay in office from morning till evening to meet purchasers. In no time he mobilised 80 lakhs for the mill. d. Besides, he also carried on the family banking business. Nor did he abandon the cotton trade in which he continued to invest lakhs of rupees. 5. Rajat Ray is of the opinion that the biggest and soundest banking and commission agency firms tended to stick to safer lines of business, where the profits were much lower. Usually the rate of commission, after deducting expenses, amounted to no more than 1%. a. The business was highly competitive, and there were too many arhatiyas jostling in the bazaar for fat commission to be had for the picking. 9  b. One must also remember that the giant international produce marketing firms such as Ralli Bros. of Calcutta and Volkart Bros. of Bombay, made deep inroads into the inland produce markets from the late 19th century onwards in order to feed import-export lines at better prices. c. The most reputable arhartias were, in fact, the suppliers of Ralli and Volkart agents posted into inland markets. d. The smaller arhatias were pushed into the less profitable marketing channels. The European inroads into the inland markets, though restrained around the time of the 1st WW, continued well into the 1920s and it was not until the Great Depression that the bigger indigenous banking and commission agency firms established their dominance over the domestic market. e. Until then [the depression], the foreign firms had the pick of the business, indigenous firms tended to operate in areas which foreign firms either found too risky, or not sufficiently attractive in terms of profits margins. 6. However, not all scholars are as convinced, as Rajat Ray is, about the imperial division of economic space in the country. Some like Morris de Morris argue that - a. Before 1914, Indian entrepreneurs stayed away from industrial ventures not because of an racial bar to their entry but because they had a more profitable activities in the bazaar. b. In his CEHI (Cambridge Economic History of India) article, Morris has argued that Europeans were typically satisfied with rates of return comparable with rate earned in Britain while Indians sought higher rates akin to those available elsewhere within India. 7. But [according to Ray] if we are to go by the reports of contemporary American consuls in India, quite the contrary was the case. He advised American businessmen that there were two distinct markets in India: a. A mass market in which the main consideration in selling goods was not how good but how cheap. b. And a small market, for high class goods, catering to about a million people whose incomes and living styles were substantially higher – the European population of merchants, missionaries, civil administrators, and officers and soldiers of the British army, the Indian princes, large landlords and Westernized merchants; and Parsee community of Bombay and Anglo Indian population with Western tastes. c. Department stores and shops that these people patronized, and where the goods obtainable were of the same quality as in Europe and America, constituted a separate market from that of the bazaar. 8. The consul further added that a. in doing business with the latter (the Europeans and the rich Indians) ‘it is possible to secure a wide profits margin but the sales must be comparatively small. 10  b. In doing business with the great masses , the margin of profit must be extremely small, however, the sales and collective profits may be enormous.’ 9. So Rajat Ray feels that, a. while the bazaar businessmen, including the biggest shroffs and arhatias were willing to operate with low profit-high volume trade, b. it was unacceptable to the sahibs, and they preferred to occupy the high profit trade that the imperial division of economic space enabled them to occupy. THE END OF PARTNERSHIP 1. The segregation of Indian enterprise in the bazaar, which was so prominent a characteristics of the developed colonial economy in the latter part of the 19th century, was not so pronounced earlier (i.e. in the 1st half of the 19th century). 2. Modern business activities developed by the European agency houses in the early part of the 19th century had a substantial element of Indian partnership before new developments from the mid 19th century drew a clearer line defining a black space and a white one. AGENCY HOUSES 1. What were these agency houses? a. The agency houses were originally the carriers of private European trade in Asian waters. At that time the trade to Europe was an official monopoly of the English EIC. b. When the Charter Act of 1813 threw the trade between Europe and India open to private traders, the agency houses of Calcutta, Bombay and Madras expanded their operations with the help of the EIC. c. As India herself turned into a net importer of Manchester textiles by the 1830s, she developed alternative primary items for exports such as indigo, to provide a means by which to transfer the growing remittances to England. d. India also developed an export trade with China in raw cotton and opium, which paid for shipment of Chinese tea to Britain. e. The Agency houses such as Palmer & Co., and many others from Calcutta, Forbes & Co. and Bruce Fawcett & Co. of Bombay, and the Parrys and Binnys of Madras were the funnels of this new trade. f. The modus operandi of the agency house is described this by R. M. Martin in 1832 A large mercantile house is established at Calcutta, with a branch in London; the partnership formed of various individuals – one a retired civil servant of the Company – another a military man – a third a doctor and a fourth a London merchant. They possess no real capital, but establish 11  an agency and banking business, receive as deposits the accumulating fortunes of the East India Company’s servants and trade on these deposits. g. The agency houses built ships, employed them in the trade of the Indian Ocean, and by a natural extension went into the promotion of insurance companies and banks. h. Once the EIC monopoly came to an end , the agency houses increased their share in the triangular trade between India, China and Europe and also started operating in bills of exchange between the three places, a business hitherto transacted by the companies alone. i. At the same time, the agency houses in Calcutta promoted industrial ventures inland: they financed the indigo planters, they put money in silk filatures (places where silk is obtained from silkworm cocoons), and even came to manage some indigo concerns themselves. j. To take an example, Fairlie Fergusson & Company, till 1812 the biggest of the agency houses in Calcutta , owned the largest number of ships in Calcutta (nine to be exact), manage the Calcutta Insurance Office and the Calcutta Life Insurance company, and dealt in a large way in opium and indigo. 2. The agency houses thus undertook the first private corporate business and industrial activities in India. However, it was not until the joint stock companies were granted limited liability in 1857 that large corporate could begin under European and subsequently Indian enterprise. 3. The agency houses also introduced the business device of the managing agency in the corporate sector. a. Under this system, a managing agent (either an individual, partnership firm or company) would be appointed to manage one or more joint stock companies. The managing agent would also hold shares in the managed companies and control their boards of directors. b. The agency houses were typically managing units in the shipping, coal mining and sugar manufacturing companies. The Indian Broker 4. Closely associated with the agency houses were their brokers. The basic function of these Indian associates was to bring in and guarantee contracts for supply of exportable produce from the inland merchants. a. The brokers were called Banias in Calcutta, Dubashes in Madras and guarantee brokers in Bombay. b. Sometimes they might be important merchants conducting business of their own: Raghuram Gosain, the Bengali Banian of Palmer & Co., was a rich merchant in his own right; so was Hormasjee Bomanjee Wadia, the Parsi broker to Forbes and Co. in Bombay. An independent merchant magnate like Ramdulal Day, 12  Bengali millionaire and owner of several ships, might act as a Banian to several American and British traders at the same time. 5. The Bania [broker] was also, not infrequently the financier of his European principal and sometimes a conduit for getting finances for them. a. Motilal Seal, Bengali shipowner and merchant magnate of Calcutta lent money while acting as a broker to Oswald Seal and Co (joint venture?). b. On one occasion he acted as a link between Oswald Seal and Co. in Calcutta and great banking firm of Lachminchand Radhakissen of Mathura. The Mathura banker relied on his introduction to Oswald and Seal Co, to make shipments of opium through latter to the great opium importing house of Dent at Canton [China]. c. The head of Palmer and Co. clarified that behind ‘the moneylenders in Calcutta’ stood the ‘great upcountry shroffs and other capitalists.’ 6. The shroffs were not dependent for their survival on the agency houses. a. By 1820s the Marwari bankers appear to have formed a world of their own in Barabazar [a locality in Calcutta]. b. However, some brokers increasingly became dependent and thus vulnerable to the tremors of the European business world. For example, according to N. K. Sinha many Bengali merchants had two weaknesses: i. Their abstention from inland trade and bazar banking; and consequently weakness of their market links upcountry. ii. The fact that unlike the Parsis, they did not venture to sail to Canton, which left them vulnerable to the tricks of their European correspondents. c. Furthermore, the insolvent agency houses had a habit of passing on their debts to these Banias. Between 1830 and 1833, reckless dealings including over- speculation in indigo brought the 6 great agency houses of Calcutta crashing down. In the process many Bengali fortunes were destroyed. THE PARTNERSHIP 1. Dwarkanath Tagore of Calcutta and Jamsetjee Jeejeebhoy of Bombay in their own unique way the pioneering modern entrepreneurs of mid-19th century India. 2. Kling has identified Carr, Tagore & Company (1834) as first equal partnership between European and Indian businessmen, and as an initiator of the managing agency system in India to a wider field of business and industry, as hitherto agency houses had used the system for insurance only. 3. Between 1836 and 1846 the firm promoted 6 joint stock companies, namely a. Calcutta Steam Tug association (1836) b. Bengal Salt Company (1838) c. Calcutta Steam Ferry Bridge Company (1839) 13  d. Bengal Tea Association (1839) e. Bengal Coal Company (1844) f. India General Steam Navigation Company (1844) 4. Jamsetjee Jeejeebhoy and Sons did not promote industrial ventures as did Carr, Tagore & Company, but it had a stronger presence in shipping, and external trade. a. A junior partner of the English in the trade with China, before the Opium War of the 1840, his firm was equal partner in the informal Malwa Opium Syndicate that had been formed between Jardine Matherson & Co., Remington Crawford and Co. and Jamsetjee Jeejeebhoy & Sons to control the market in Canton. b. His firm was engaged in sailing ships to China and England, and in transacting bills of exchange between India, China and England. 5. The new age of partnership was characterized by the rise of European style banks, in which Indian capitalist had a significant part as promoters and stock owners. a. The semi official Banks of Bengal, Bombay and Madras (1843) were discouraged by the government from operating in the foreign exchanges, a business that fell wholly to the private European agency houses after EIC withdrew from the field in 1833. b. To take advantage of this expanding business [forex market], Mackintosh & Co. and other European agency houses of Calcutta promoted the Union Bank in 1829. c. The new bank, which served as the prototype of the later exchange banks had its capital augmented considerably (1835-39) by Dwarkanath Tagore and his European friends to finance the innovative schemes in which they were involved – steamboat on the river Ganga etc. d. The first exchange bank in the financial history of India, the Bank of Western India (later renamed Oriental Bank) was promoted in 1842 by a mixed group of European and Indian capitalist of Bombay. e. Dwarkanath Tagore died in 1846. Before his death he had become wary of the unscrupulous practices of his European colleagues which he found ‘at variance with the proper practice of banking’. He systematically sold off his Union Bank shares. f. Due to the unsound exchange transactions with London and insecure advances in the falling indigo market the Union bank failed in 1848, bringing down with it various other Indian enterprises in India that had sprung up in partnership with Europeans. Consequently, the Bengalis experienced a general collapse of faith in European business reliability. g. European enterprises were afterwards reorganized without Indian partnership, and all Dwarkanath Tagore’s ventures passed to exclusive European control. 6. The trend towards growing British control of business concerns in India was not confined to Bengal alone. As the world finance became centred in London, Jamsetjee Jeejeeebhoy found himself forced out of his earlier lucrative bills of exchange 14  business. With Jardine, Matherson and Co. growing into an international giant in his later life, his firm was ultimately overshadowed in China and London trade. Break in Partnership: The Move to London 1. The careers of Dwarkanath Tagore and Jamsetjee Jeejeebhoy show unmistakably that after mid 19th century the international environment was no longer favourable to the growth of big Indian business in the country’s ports and abroad. 2. Between 1850 and 1880 a series of technological and organizational changes – the completion of railways, building of Suez canal etc. – decisively shifted the power away from the smaller Indian firms to bigger European firms in India, and from India itself to the world centre of trade and finance based in the city of London. 3. We have seen that the early exchange banks were located in India, with strong Indian partnership: they now shifted their headquarters to London, beyond the reach of Indian businessmen, and consolidated their hold over Indian exchange and finance by remote control. a. The European directors were able to wrest control and shut out Indian directors by holding out the advantage of royal charter conferring limited liability and the right to operate in British colonies east of Suez. b. The Oriental Bank, the Charted Bank of England, Australia and China, and other newly opened exchange banks, came to monopolize the financing of India’s export-import trade, in which, according to Rajat Ray (RR), they instinctively favoured European as against Indian merchants. c. In other words, according to RR the European banking system was now complete in all respects, it no longer needed the Indian finance or the Indian financial network, and its tendency was to shut out the Indians. 4. Furthermore, RR asserts that, it was not merely the European system of banking that was tightening; a. Shipping: Simultaneous to changes in banking, the great steamship lines were forming ‘conferences’ which was in essence monopoly rings to exclude all competitors by such means as rate wars and deferred rebates. At times they were also favoured by government contracts, e.g. for carrying mail. i. Native shipping, which had been at a point of collapse even before the rise of the steamship liners was swept clean from the runs on which the liners came to operate. ii. Nor could the Indian firms switch to steam navigation. The P&O Company formed in 1875 the first shipping ring, called the Calcutta Conference, with a few other steamship lines of London, Glasgow and Liverpool to prevent all newcomers from entering their preserve. b. Managing Agencies: In the meanwhile big European Managing agencies had arisen in Calcutta, Bombay and Madras. Closely financed and supported by the Presidency Banks and the exchange banks. 15 c. They were engaged in extensive imports of manufactured goods from Britain and in exporting raw cotton, raw jute, gunnies (jute bags), hessian (coarse fabric made of jute), cotton yarn, grains and seeds, tea, etc. d. The shipping ‘conferences’ and managing agency oligopolies soon came to be interlocked. i. Shipping conferences of British steamship companies, locally administered in Calcutta by leading European managing agencies monopolised the carrying of merchandise between ports in India and other ports of the British empire. ii. The leading European exporters themselves, organized monopolistic managing agencies came to the aid of shipping rings as the latter’s agents. iii. Occasionally there were conflicts between European exporters from India and the Liners. For example in 1880s when faced with the high monopolistic rates charged by the Conference liners, the European tea exporting firm opened a Planter’s Line in 1889 and the India Mutual line in 1893, the Liners’ Conference killed both lines by rate wars, but brought the shippers round in 1895, by giving them more favourable terms which met tea shippers objections. e. It was quite otherwise when Indian businessmen and industrialists sought to break through the monopoly shipping rings. i. A conference had earlier been formed between P. & O., Nippon Yusen Kaisha, Austrian Lloyds and Rubbertino on the line operating out of Bombay to the Straits settlements and the Far Eastern ports. ii. The Conference led by P. & O. charged exorbitant rates on Indian shippers of yarn, opium, and cotton to China and Japan, while at the same time giving favourable rebates on freight to European shippers based in Bombay. iii. In the 1893, Nippon Yusen Kaisha breaking out of the alliance with the rising Japanese shipping business groups formed a partnership with Jamsetjee Nusserwanjee Tata in the interest of Indian cotton mill owners, who were being discriminated against. iv. The British government took a hostile view of the NYK-Tata agreement, the combination of P&O Austrian Lloyds and Rubbatino proved too strong for the two allied Asian lines of steamers. P. & O. cut rates from ₹19 to ₹1-8 and even offered to carry cotton free to Japan. v. One by one, the Indian cotton mill owners, on whom J. N. Tata had relied for support, deserted him. Tata line collapsed, NHK returned to the Conference in 1895, but by demonstration of its muscle (thanks to the support of the sympathetic Japanese government) brought freight rates to Japan below freight rates to China, despite the longer run. vi. By contrast, Bombay exporters to the Straits Settlements, Hong Kong and China were penalised by high rates of freight. 16 5. Thus, according to Rajat Ray, the 2nd half of the 19th century established a clear-cut racial division of economic space. He feels that coming together of the following entities, was too formidable a combination for the Indian businessmen to contend with. a. The presidency and exchange banks and b. Liners’ Conference and c. the European managing agencies d. favoured by a benign imperial government committed to free trade (as against the Japanese government’s mercantilist nationalism), 6. Prevented from competing in sea trade on equal terms, the Indian businesses turned inwards. They had formed wider connections in the inland trade and banking in the course of feeding the long distance import-export lines, such as the line sending opium from Malwa down to Bombay. a. While firms like that of Tagore and Jeejeebhoy declined, the Gujarati and Marwari bankers and merchants operating inland survived by virtue of their wide-ranging credit and marketing operations along the routes running from the inland produce marts to the ports and between the inland market towns. b. In the process the huge sprawling world of the bazaar was segregated from the consolidate enclaves of European banks and corporations. Segregation on this pattern meant a certain measure of autonomy and the possibility of growth within the confines defined by the imperial economy. 7. Networked firms that arose from the migrations of enterprising merchant communities in the 19th century were the best in the position to take advantage of the spreading network of railways and telegraph. a. Immigrant Marwaris and Bombay Bhatias, and not the local traders, were the masters of the new system of trade by rail and wire. b. Significantly the system of integrated forward trading and speculation that developed in the inland exchanges was largely in the hands of those mobile merchant communities from among whom many of the Indian industrialists were destined to emerge. INDUSTRIAL ENTERPRISE IN THE HIGH NOON OF THE EMPIRE 1. From about 1857 to 1914 the European enterprise, which had established itself in the new form of the industry in previous half of the 19th century, enjoyed a position of unchallenged supremacy in the Indian economy. a. The first European industrial complex, in India, consisted of cotton mill, an iron foundry, a distillery, an oil mill and a paper mill was erected in 1873 at Fort Gloster, 15 miles from Calcutta on the banks of the Ganges. b. The first private tea plantation in Assam was set up by The Assam Tea company incorporated in London, in 1839. 17  c. The first cotton mill in western India, a spinning mill at Broach, was floated by James Landon in 1854. This was followed by the first Bombay cotton mill set by Cowasjee Nanabhoy Devar in the same year. 2. These were small beginnings. A change in company law in 1857 permitting all companies other than banks and insurance concerns to be formed on the basis of limited liability, and two further acts in 1860 and 1866 extended the privilege to banks and insurance companies, laid the foundations of the corporate sector firmly. Railways and Industrialization 1. These changes in company law, coinciding with the expansion of railways (by the end of 1870s, the railway system was completed in all essential respects), and business corporations, for the first time, came to occupy an important position in the country’s economy. 2. And yet, during those vital years when Calcutta, Bombay, Madras and Delhi became linked to one another by the railways, the country missed a critical opportunity: the opportunity of inter-linked growth of the railway, iron and steel manufacture, coal production and the related engineering industries on the pattern that took place in Russia and Japan around the same time. a. The railways, as we have already discussed, was the greatest single injunction of British capital into India, was built almost entirely by means of imported locomotives, rolling stock etc. b. The ‘Buy British’ policy, as Daniel Thorner has pointed out, withheld from India an impetus to industrial development that proved quite effective among other leading railways powers – particularly the US, Russia and Germany. c. India alone of the countries with the great railway networks remained unindustrialized, with her capacity for production of capital goods and her potential for the basic and heavy industries remaining almost entirely untapped. 3. The freight policy followed by Railway companies served to split the interior of India and twist it towards Britain in the crucial early years, especially their tendency to a. Charge lower rates for the carriage of long-haul bulk goods from the interior to the ports and for finished goods being sent from the ports to the interior than goods moving between two railway stations with comparable distances within the interior, and, b. Charging of specially high rates on traffic movement over the sections of their lines linking up with the rival systems 4. The railways thus promoted lines of commercial and industrial activity in which European firms with strong links to Britain could easily overshadow Indian firms (which had no such links.). a. In other words, Railways created an economic space reserved for European enterprise. In that space arose great managing agencies, which began to concentrate in the 1870s the mills, mines and plantations begun earlier by speculative European businessmen in a small way. 18  b. In short, RR asserts, railways did little for industrialization in India, but it provided impetus to the planting and processing of world commercial crops by planters and mill owner, and the extracting of ores for exports or for the running of railways. The Characteristics and Pattern of European Enterprise in India 1. As far as industry was concerned, the type of industrial evolution, with a bias towards light manufactures which intended to harness the country’s agricultural resources to the requirement of foreign trade, was the natural consequence of the pattern railway development in India. That pattern serving Britain’s interest more than those of India cannot be comprehended unless we keep in view the latter’s colonial dependence on the former. 2. The Indian firms that acquired a toe-hold in modern industry, especially in Bombay and Ahmedabad, following the same system. The process of concentration was more or less complete by early years of 20th century. An official of the India Office wrote privately in 1912: Nearly all the tea, coal, jute mills in Bengal and Assam are under European Management, in most cases the bulk of the capital is European…Broadly speaking, I should say that in the Bombay presidency possibly the Parsis and other non- Europeans own half or more of the mills and the other industrial concerns; but that elsewhere in India the non- Europeans share is less than 1/4th or may not exceed 1/6th or even 1/8th. 3. Apart from the railways and steamships, British enterprise confined itself to export industries, e.g. tea, coffee, indigo, jute goods and to extractive and trading operations. The only manufacturing industry that European entrepreneurs developed into a major industry was jute. 4. In other words, RR believes that, European manufacturing and trading operations in India concentrated on producing goods for export to the advanced countries and were not very useful for developing the industrial potential of India. In that sense their industrial operations were ‘an outpost of Western economies’ not an organic part of the internal economic structure of India. 5. In terms of country’s material advancement, the great European export industries – tea and jute- had particularly weak linkage effects and a miniscule share of the gains was ever passed on to the Indian producers of the raw material these industries used or to the labour that worked for them. For example, a. The GOI passed labour and migration laws which enabled Assam planters to turn the immigrant labourers into bond slaves, who worked in harrowing conditions at shameful wages. 19  b. A strong association under the Bengal Chambers of Commerce similarly enabled the European jute mills, in and around Calcutta to obtain raw jute from the peasants at depressed monopsonistic prices compared to its real value in the world market. 6. On the other hand, in industries such as cotton and iron and steel, that were meant for India’s internal consumption - the very industries, as Amartya Sen points out, that laid the foundation of industrial revolution in Britain – the European role was marginal compared to the part played by the Indians. 7. It is, however, noteworthy that while most of European managing agencies were engaged in import of manufactures, and export of country produce with a bit of light manufactures, one exception to this colonial bias was the coal mining industry, the growth of which was, however, held back by the low state of the iron and steel and engineering industries. 8. What explains the particular pattern of European enterprise – its typical bias? a. One answer suggested by Amartya Sen is the social ethic of expatriate British firms in India, one that inhibited them from competing in lines that might harm the interests of the mother country and by implication British industry. b. Another possible explanation, suggested by Morris D. Morris might be certain purely material considerations – expatriate firms with strong connections at ‘home’, found it advantageous to concentrate on the organized markets of the advanced countries to which they had ready access through London. 9. Business and industry were overwhelmingly concentrated in the ports of colonial India, especially Calcutta and Bombay. Madras has much smaller component of business. a. The principal European industries – jute, tea and coal – had headquarters in the premier firms of Calcutta. b. European interests in Bombay consisted of great variety of marine, fire and life- insurance companies, a considerable number of cotton presses, and a few spinning mills that did not compete with Manchester. c. In Madras, while the scale was small, a variety of activities, such as curing of coffee, shipping, insurance companies and exchange banks and refining of country-made molasses sustained the established expatriate firms. 10. The managing agency houses were seldom pioneering firms. It was not the great managing agencies had developed the early European concerns in jute and tea. They were floated by a set of reckless, unscrupulous, insubstantial speculators whose one idea was to get rich quick by selling off half-cleared gardens and mismanaged mills at a profit while the tea mania (1863-66) and jute rush (late 1860s to early 1870s) lasted. a. The early jute mills of Calcutta did not thrive – they merely displaced the handloom products in the court and the coastal markets and were quite incapable of penetrating the great markets abroad which the Dundee mills dominated. 20  b. Many of the rickety early concerns collapsed – the tea gardens in the crash of 1866-68, and the jute mills in the trade crisis building up in 1875-80. c. Thereafter a reorganization of the tea and jute industries under the reputable managing agency houses of Calcutta led to a period of stable expansion. Backed by the wider connection so the new management the jute mills broke into the Australia, New Zealand and San Francisco markets competing successfully with the Dundee mills. 11. However, according to Rajat Ray, the newly dominant managing agency houses were not above swindling the public – they were deeply involved in the flotation of non- existent gold mines in the 1890. 12. But by the end of the 19th century, the new economic space created for them by empire had enabled European houses of Calcutta to build up a reputation for soundness and integrity in the management of their industrial concerns. a. They tended to be conservative, insisted on sound finance and they confined themselves to sure bets, the ones that empire brought within their exclusive grasp. b. They showed in particular, a penchant for taking over properties going cheap because the original promoter had started the plantation, mine or mill by unscrupulous methods and had subsequently vanished. But at the same time, they got together to fight any local rivalry with fierceness. Evolution of Indian Industry 1. Before the 1st WW, the Bengal, Madras and Upper India Chambers of Commerce had practically no Indian members and Bombay Chambers of commerce alone had a notable Indian element. In eastern India, Indian enterprise was confined to second- class tea gardens in Jalpaiguri district and the mines producing inferior coal for household use. 2. Morris D. Morris, however does not agree with this analysis of racial barrier to Indian entry. As we have seen before, he argues that profit rates were not high enough to attract Indian capital to the jute industry. Rajat Ray on the other hand feels that jute mills were by far the most attractive investment on the Indian business scene, the rate of dividend on the face value of ordinary shares in boom years (such as 1904-7 to 1911-13) being in the range of 20%. to 25% a. According to Bagchi, one basic consideration that deterred Indian entrepreneurs from entering the jute industry that the markets lay abroad and the export trade of Calcutta, unlike that of Bombay, had entirely passed out of Indian hands in the later 19th century. b. According to Ray, contrary to Morris’s conviction that nothing but cost had kept Indians from setting up international sales agencies abroad, there was a race bar. As G. D. Birla’s experience subsequently revealed. The London Jute Association did not admit Indians, any Tom, Jack or Ragstraw could negotiate sale or purchase in the Sales Rooms in London, but not Birla himself. 21 3. The cotton [spinning] mill industry of Western India, by contrast, catered to markets to which Indian capitalists had ready access within the country, being intimately linked, especially in Ahmadabad but also in Bombay, with handloom production (the mills generally sold machine spun yarn to the weavers), bazaar banking and other multifarious indigenous material activities. a. The Bombay mills were managed on western lines; the Ahmadabad mills bore the stamp of native mercantile and manufacturing traditions. b. What was common to the capitalists of Bombay and Ahmadabad was that they were both able to wrest a place for themselves in the new economic space created by empire. c. Interestingly, Bombay merchants retained some of the oceanic connections they had formed earlier. In those early days they had sent goods abroad on consignment. Despite the change taking place from consignment system to the order system (after the telegraph revolution) in the European trade, Bombay merchants managed to retain a toehold in the foreign trade. 4. Indian merchants from Bombay and other ports on the Cutch-Gujarat coastline continued the trading connections they had forged to China, to the Straits Settlements and to the Persian Gulf, the Red Sea and the Swahili-speaking coastline of Africa. a. Furthermore, European control could not be established over the rich cotton and opium belts of Western and Central India which fed the port of Bombay, due to variety of factors such as i. the strength of the Indore, Ahmadabad and Berar merchants, and ii. the division of the hinterland into autonomous princely states like Baroda, Indore and Hyderabad. b. The most well known group trading in Broach cotton and Malwa opium to China were the Parsis. c. Among other merchants may be mentioned the socially orthodox Khojas and Bhatias, who along with the westernized Jews and Parsis came to own the greater number of mills in Bombay. Khojas and the Bhatias were the principal carriers of the purely Asian trade of Cutch and Gujarat to Muscat, Aden and Zanzibar after the early part of the 19th century. d. Apart from those mentioned above one must keep in mind the highly orthodox Gujarati bankers and merchants of Ahmadabad who had a share in cotton and opium exports though Bombay. They made fortunes from opportune cotton consignment during the raw cotton boom connected with the American Civil War. e. One should also remember the Marwari traders and bankers of Malwa whose shipments of opium were unabated and unaffected by the collapse of the cotton boom in 1866. 5. After 1875, the Jewish (e.g., Sasoon group) and other European groups pushed backed the westernized Indian capitalists from seafaring operations as the ‘order system’ 22  operating from London [instead of the older consignment system], with wire, steamships and exchange banks excluded them from the overseas markets like China, a. nevertheless, the Europeans were not able to penetrate the heart of opium belt in Malwa. Here the Marwaris of Indore and the Gujaratis of Ahmadabad continued to hold sway. b. In the marketing of textile products and supply of raw cotton too, the enterprising communities of Western India continued to enjoy a type of strength and confidence not to be seen elsewhere in India in the high noon of imperialism. 6. These factors explain the impetus behind the burgeoning cotton mill industry of Bombay and Ahmadabad, which expanded steadily despite the laissez faire economics of empire and political hostility of the Manchester lobby. 7. According to Rajat Ray, conditions for the growth of a modern cotton textile industry were very favourable in India, it would have been a little strange if this industry had not developed; a. the country was producing 20% of the world’s supply of raw cotton, a place occupying next only to US; b. India had an abundant supply of relatively cheap labour which became cheaper as the mills moved inland and closer to the cotton fields; and c. it had in its vast population and its countless weavers, the world’s biggest railway connected mass market for coarse cotton fabrics and yarn. 8. The initial beginnings [of modern cotton textile in India] were quite small, and Manchester was not threatened since the markets were not quite the same. a. The early mills did not manufacture the finer fabrics imported from Manchester and concentrated on producing low count yarns for handloom weavers which would otherwise have been spun by women. b. As already noted, the cotton mill industry was initiated by a Parsi in Bombay and a Gujarati Nagar Brahmin in Ahmadabad in the 1850. i. Cowasjee Nanabhoy Devar was the archetypical Bombay broker and financier, was an active exporter of cotton before he founded the Bombay Spinning and Weaving Company. ii. And Runchhodlal Chotalal, an English-educated ex-bureaucrat, was an employee of the banking firms – Karamchand-Premchand, when he founded the Ahmedabad Spinning and Weaving Company. iii. The cotton boom during the American Civil War, and the intimately connected share mania stroked up by the stock broker king Premchand-Roychand helped. c. As the mills multiplied in Bombay and Ahmadabad, they fell into the control of certain families which emerged as the captains of the growing industry – Parsis, Bhatias, Khojas, Baghdadi Jews and Europeans in Bombay, and Bania, Nagar Brahmans, and Kanbis (Patidars) in Ahmadabad. 23  d. The Hindu and Jain presence was far stronger, indeed exclusive, in the cotton textile industry of Ahmadabad. e. The biggest group of textile mills belonged to the Sasoons divided into three separate managing agencies. The Sasoon mills might be more properly grouped with European mills 9. The speculative activity of the early 1860s – an extraordinary chapter in Bombay’s financial history (1861-65) – was all the more remarkable because Premchand- Roychand and his Indian associates overshadowed for a time even their European Partners. What it indicated was the extraordinary strength of its commercial traditions. a. While many magnets burned their fingers in collapse of the share boom in 1866, including Premchand, Jamsetjee Nusserwanjee Tata, the Nagar Seth family of Ahmadabad, many more speculators in Bombay and Ahmadabad managed to add to their fortunes. b. By an estimate the boom added to ₹ 70 to ₹77 crores to the wealth of Bombay alone during the 5 years. 10. It will be evident by now that the Bombay and the Ahmadabad mills developed on rather different lines. The remarkable feat of the Bombay mills was to break into the market for yarns in China at an early stage. a. The Petits (a Parsi family from Bombay) who had a strong presence in China trading led the way therearound 1882, outbidding Manchester yarns by virtue of the fall in the value of silver (the currency of China and India) as against gold (the currency of Britain). b. This became the main line of production for the Bombay mills: no less than 60% of the yarns annually, manufactured by them were exported to China every year over 1904-08. c. The export of Indian piece goods was not so extensive but still formed around 25% of the total Indian production in 1900, mostly on account of the Bombay mills. These goods too were distributed in areas where the Bombay merchants had a long established presence: the East African coast, the Persian Gulf, Ceylon and the Straits Settlements. d. The Ahmadabad mills on the other hand expanded in the early stage mainly by supplying yarns to the handloom weavers in India. Behind the formal presence of the companies and mills in Ahmadabad there was a far stronger informal presence of pedhis and weavers. 11. By the turn of the century the substitution of mill yarn for hand-spun yarn was more or less complete in the handloom weaving industry of India. a. The lower yarn prices stimulated a perceptible concentration of handloom weaving in the urban centres of Western India, a development accompanied by the emergence of indigenous workshops (karkhanas) of weavers there. 24  b. The growing handloom industry in its turn, enabled the cotton mill industry to expand by providing it with a large and growing market for its yarns. Thus a real integration was achieved between machine made yarn and handloom textiles. c. Another development brought about by the Swadeshi movement (1905-08) and the displacement of Bombay yarns by Japanese yarns in the China market was an increasing tendency to produce cotton fabrics for the home market, which offered an even stiffer competition to Manchester piece goods. d. Overall, the cotton mill industry contributed to the wealth of the country and the welfare of its population. 12. The beginning the 20th century witnessed another momentous development, again thanks to Bombay-based capital: the emergence of the steel industry. 13. In this context it is pertinent to ask, why and how did Tata Iron and Steel company (TISCO) succeed whereas earlier British attempts, including the latest Bengal Iron and Steel Company (BISCO) had failed to produce steel commercially? a. The answer is that there were formidable problems to overcome, BISCO and the earlier British Iron works in India [such as IISCO] were on too small a scale, with insufficient amounts to spend to solve these difficulties. Then problem was to find the right location amidst vast uncharted spaces to set up a works bigger in scale than anything Asia had witnessed before. b. The Tatas solved this problem: they conducted an epic search through the wilds of Central India for many years, and spent unheard of sums on the exploration before they located the site, which as near the sources of cheap and best quality iron ore and passable coal with ready access to Calcutta, the largest market in India for Steel, and low cost limestone and dolomite for flux available nearby. The site was the most economic in the world. c. Even so the Tatas would have never embarked on the venture had they not been assured of government support. Government and railways, the largest purchaser of steel in the country, had pursued an unalterable policy of ‘buy British’ until the end of 19th century. i. What change the attitude of the government was Curzon’s new imperial vision at the turn of the century. His pursuit of strategic interests from the Gulf of Persia to the heart of Tibet dictated the building up of India as a broader base of power. ii. This attitude was further strengthened by the WW-1 when the Munitions Board had to gear itself up to the task of ensuring an adequate supply of steel east of Suez in view of the German menace. iii. Curzon’s government gave TISCO the vital new railway connections to the site and a guarantee to buy 20,000 tonnes of rail annually for 10 years at import price still keeping within the broad framework of the laissez faire policy of the 19th century policy. d. Tatas sought to raise the money for the plant initially in London, but according to Rajat Ray, the British investor wanted the cream of business – control over the works without any share in risks. Eventually the Tatas raised the money in the 25  large and well organized Bombay money market, with a fair amount of ease, as the Swadeshi movement had changed the political and economic climate of the company. INDUSTRIALIZATION 1914-1947 1. Under the high noon of the empire, as already mentioned, Rajat Ray postulates that the economic space had been divided between a. The stable, assured, steadily profitable investments space reserved exclusively for the European enterprises (although some Bombay-based Indian entrepreneurs had barely managed to retain a toe-hold in it by virtue of the strong maritime connection they had forged in the earlier phase of the empire), and b. The second space – a limited and constrained space – an Indian space – the bazaar. c. Under the imperial scheme of things risks and uncertainties, as far as possible, were to be absorbed by the second space – the bazaar. 2. As the imperial sun crossed the meridian with the outbreak of the WW-1. The division of economic space maintained so carefully in the high noon of the empire could no longer be sustained as bazaar based houses encroached relentlessly upon the exclusive space the empire had created for the Europeans in its heyday. 3. The imperial structure was profoundly shaken by the 1st WW and the Great depression. a. The interconnected lines of the railways and the steamships were spasmodically interrupted and the domestic market for industrial investment grew into the major field for investment in the inter-war period. b. In the domestic market, the bazaar firms enjoyed a natural advantage by virtue of the marketing and the credit connections they had formed across the whole country. c. As the depression hit at the foundation of the foreign buying and selling organizations and a whole range of business turned inwards, the bazaar emerged as an integrated system of inland transactions (through hundis and arhats) between distant market towns (mandis). d. Under the new circumstances, the expatriate British firms could no longer shut their native associates and competitors out of the warm place in the sun. 4. The most significant developments in the business scene of the period were: a. the advance of the bazaar-based Indian houses into modern industry, b. accompanied by the decline of the expatriate firms and c. the emergence of Multinational Corporations (MNCs) 26 THE 1920S 5. Entry of the Indian business enterprises in the hitherto exclusive European space was dramatically demonstrated by the forceful entry of the Indian businessmen in shipping and external trade in the 1920s. a. G. D. Birla, led the Marwari traders of Calcutta in establishing direct contacts with the jute market in Europe. b. He established the first Indian office in London in 1917 for the export of jute and soon became one of the three leading jute exporters. c. Initially he was the only (Indian) member of London Jute Association, a position he obtained by threatening to start trading directly with the (European) Continent under Continental arbitration. But the Commercial Sale Rooms and the Baltic Exchange, where the actual sales and purchase was conducted, would not admit him despite his membership of the London Jute Association. He had to employ an English clerk to do the business while members of other nationalities, including the Japanese were let in without hindrance. d. The Federation of Indian Chambers of Commerce and Industry (FICCI), newly formed in 1927, to represent Indian business interests, put pressure against the bar to entry of Indians, and in consequence the ban was lifted at the end of 1928 by the sales room of London. e. The race bar came to an end, [at the culmination of] a gradual process of Marwari entry into the baled jute export trade at the Calcutta end which had begun in a perceptible matter during the 1st WW. f. At the end of the [2nd World] war more than 50% of the members of the Calcutta Baled Jute Association were Indian firms though their share in exports was much smaller as yet. 6. Indian were at length were becoming more important in the foreign trade of their country at a time when the trade itself was ceasing to be the essential lever in the mechanics of economic domination. 7. Many institutions that seemed to have differentiated on racial grounds, began to change their attitudes. For example, exchange banks that were almost exclusively owned by the Europeans and had lent only the Europeans in the past, in the 1920s began to finance the import/export bills of the Indian traders to a greater degree than before. 8. The 1st WW was a watershed in every respect. It initiated those long term political and economic developments whereby power was transmitted gradually to Indians. a. Its immediate impact was felt in the form of i. reduced imports stimulated industrialization by import substitution, ii. disorganized the supply of expatriate firms, and iii. brought more liquid assets in the hands of the bazaar operators (Kalkattake Bade Bazar mein dhan barasne laga) which partly found its way into the industrial field. 27  b. The Indian investors, especially Marwaris speculated in a big way on stock exchange and in the futures of key export commodities. They threatened to disrupt the established channels of trade and commerce. c. From the European point of view, the most dangerous aspect of the [Indian] speculative activity was the tightened Marwari grip over supply lines. d. The speculative, industrial and trade activities of the Indians entrepreneurs threatened the European businessmen in another way, the wealth that these activities generated was used to breach the industrial monopolies hitherto enjoyed by the European managing agencies. i. “Indians are determined to get into our industry” exclaimed, Sir Edward Benthall, the startled head of a Jute company Bird Heilgers, as no less than 7 jute mills, led and encouraged by G. D. Birla, sprang up in the 1920s. ii. Equally startling was the take-over of coal mills by the Marwaris. e. Although Omkar Goswami feels that some of these developments might have taken place before the 1st WW, Rajat Ray rejects the idea and i. sides with A. K. Bagchi, who believes that the absolute European control over jute trade and industry came to an end when Marwari speculators pushed up the prices at which European dealers had hitherto bought jute fibres from the interior for the mills around Calcutta ii. In the bailed jute market, the development of strongly organized futures in Calcutta enabled G. D. Birla and other Marwari shippers to undersell the Europeans through cut price exports by hedging in the futka bazaar (the futures market) iii. The IJMA complained, bitterly in 1928 about the ‘inside market’ (bhitar bazaar) or the futures, but by 1933 the gradual destruction of the hegemony of the expatriates by Indian firms (11 of them outside IJMA and two inside it on their own terms), but 2 years later, IJMA ruefully found it better to make ‘substantial concessions’ to the Marwari interlopers. 9. One must take care, however, not to exaggerate the extent of the decline of the European and the ascendancy of the Marwari. a. Despite a series of takeovers of collieries (coal pits/mines) and jute mills between 1942 and 1945 by the Bajorias, Bangrurs, Goenkas and others, the overall share of Europeans in share capital invested in Calcutta still formed 72% of the total rupee capital in 1947. b. As late as independence, Indians accounted for no more than 28 out of 85 jute mills in the country. Many of them were quite small and at no point did Indian capitalists control more than 20% of total loom capacity. 28  c. Majority of the tea companies too were sterling companies incorporated in London, which the Marwari had no means of taking over. Till 1947, the tea industry remained even more predominantly European than jute or coal. 10. In fact, it was not in the established export industries like tea in which the Indian capitalists made the biggest advances after the war, but it was in a new range of manufacturers for which the domestic market, protected by war-time cutting off of exports, or by high revenue or protective tariffs afterwards, was the principal market. a. The European managing agency was not able to extend their hold to the new range of industry and the houses rising from the bazaar were able to capture them, and in some instances by new MNCs that had little in common with the old European Managing Agency Houses. b. The MNCs entered the market towards the end of the inter-war period, concentrating on technology intensive capital goods and certain specialized consumer goods for the middle class. c. The business houses rising from the Bazaar on the other hand, thrust into the news areas that had attracted the MNCs, as well as into the field of mass consumption products requiring no complex technology. Such consumer goods catered to a low priced mass market in which import substitution was more or less complete during the Great Depression. d. The market for Capital goods opened up later – not before the 2ndWW, and on a much smaller scale. The MNCs soon established their presence in this field, by the side of the Indian houses. PHASES OF INDUSTRI ALIZATION 1. The pattern of entry into the industrial field by managing agencies, bazaar houses and MNCs would become clearer if we bear in mind that there were 3 distinct phases, in the development of large-scale industry in colonial India. 2. The phases overlap to some extent but are distinct enough to be roughly identified as a. 1850-1914 b. 1914-1939 c. 1939-1947 3. The first phase, as we have already seen, was dominated by the European managing agencies. a. It saw the development of light manufacturing, plantations and mining which relied heavily on the markets abroad. b. The tea and jute industry of eastern India were almost pure export industries c. And the greater part of the cotton textile industry of Bombay also catered to the Far East. d. There was no serious competition as yet in the Indian domestic markets with industries of Britain. 29  e. The coal industry, which depended on the domestic market, was primarily consumed by the railways. f. Steel which did promise a revolutionary breakthrough based on the domestic market, was produced in too small a quantity to make any perceptible difference to the total value of the industrial production. g. The industries of the period developed in areas of natural advantage, based on rudimentary technology easily imported from Britain. 4. The second time span or second phase of industrialization, distinguished from the earlier one by its orientation to the domestic economy (market) and from the succeeding one by its simpler technology. a. The 2nd phase saw the development of competition between the indigenous Indian enterprises and the advanced Western firms for the possession of the mass market for consumer goods within the country. b. Side by side the older textile industry there sprang up a new range of light manufacturers, all protected by war, tariff and depression. The production of cotton textile, sugar, paper etc. surged ahead within the sheltered domestic market helped by relatively simple technology. c. By the end of the 2nd period, import of Manchester cotton textiles, Java sugar, and foreign paper of all sorts except newsprint were more or less eliminated by the burgeoning manufacturing units owned by the Indian businessmen and industrialists. d. One critical development that went beyond the aforementioned was the Great Extensions Programme of Tata Iron and Steel Company (1916-1924), the completion of which for the first time made the steel industry a considerable one. e. Industrial growth during the inter-war period that had slowly created a market for the heavy engineering and chemical Industries and the expansion of TISCO acted as an enabler for Indian industrialists to cater to this market. 5. Phase three, thus, was marked by the beginning of the capital goods industry. It was, however, the technological leap of the 2nd World War that allowed the Indian industry to launch out the new and complex lines of production. a. The production of basic and heavy capital goods was hampered by formidable technological problems arising from the absence of essential equipment, machinery and technical know-how. b. The problem dictated a new pattern of corporation between the big Indian houses and several multinational corporations by the time of independence. c. The changing industrial scene contracted the sphere of the old European managing agencies. d. The declining of European managing agencies and the rise of Indian firms coincided with the shift from export-oriented industries to Industries catering to the domestic market. 30 6. The shift [from export oriented to domestic market oriented industries] began imperceptibly after the 1st WW, and became perceptible during the depression. a. In fact, the wartime boom in the typical European industries continued till 1920 based on heavy exports of jute, tea and even coal with no hint of decline on the surface. b. The boom encouraged the big houses like Bird Heilgers and Andrew Yule to float a number of new engineering, power, electricity, paper, tannery, leather, graphite, saw mills and other companies. c. However, many of these new concerns perished with the collapse of the short lived post warboom which was followed by a severe and cyclic depression from the middle of the 1920 through 1922. 7. The sound ‘core’ of European business contracted irreversibly as the Depression struck in 1930. a. The export markets in tea, jute and minerals - the mainstay of the expatriate firms - collapsed. b. The problem was that the European managing agencies being confined to a stagnant ‘core’ business in which there was not much profit to be made had no surplus funds to invest (and thus were making no new investments while Indians were entering new industries). c. In short, suffering from loss of drive on various front – political, financial and entrepreneurial – i. the Europeans were becoming more and more preoccupied with retaining control of what business they had in view of the growing Indian takeovers. ii. After the 2nd WW they were psychologically on the defensive. “We will not be eliminated” wrote Edward Benthall, head of a jute company Bird Heilgers (who, incidentally, was also a delegate on the 1st Round Table Conference). 8. Unlike the export markets, the domestic market for industrial products was not paralyzed by the fluctuations of the 1920s and the depression of the 1930s. a. Cloth, the greatest mass market in India underwent a long-term expansion in terms of per capita consumption: i. 9.8 yards in the last stage of the 1stWW, ii. 13 yards on the eve of the Depression and iii. 14.4 yards in the late 1930s. b. The depression, while it did temporarily disrupt the normal channels of trade in the country, coincided with the imposition of a high revenue tariff on the imports and the grant of protected tariff to cotton textile, sugar and other industries thereby rapidly expanding the share of the domestic market possessed by Indian industry. 31  c. In terms of profitability the two major export industries, jute and tea, and to a lesser extent: coal were steadily going down in the 1930s while a variety of protected industries, cotton, steel, sugar and paper were experiencing investment booms on account of rising profits at the end of the Depression. 9. But during the Depression, the expatriate firms which had a strong presence from the interior to the colonial ports were compelled by falling profits to withdraw their presence from the interior to the colonial ports, leaving the entire inland business to the bazaar nexus of the shroffs and the arhatiyas. a. The Indian businessmen, besides have more connections in the Bazaar, were able to cope up with Depression by shifting investment from the depressed trade sector to domestic industry. b. Furthermore, according to Rajat Ray, they were altogether less deterred with business difficulties of the period as they were impelled by their great determination, grit and growing psychological commitment to the process of Indian industrialization. i. At the same time Civil Disobedient movement (which was accompanied by massive boycott of foreign cloth) together with trade depression and protective tariff decisively broke Manchester’s hold over the piece- goods market in India. ii. Although the Bombay mills experienced great difficulties, bazaar type industrialization in smaller centres of production pushed up the mill production of cloth from 2259 million yards in 1926-27 to 4269 million yards in 1938-39. c. But the most dramatic impact of the production was seen in the rapid development of the sugar and paper industries in 1930s, a process in which the houses coming up from the bazaar, took the leading part. 10. The Tatas and the Bombay mill owners had graduated out of the bazaar long ago. Unlike them Ahmedabad mill owners and the upcoming houses of the 1920s and the 1930s, were closely tied to a variety of spot and forward transactions in the bazaar. To take some examples – a. The Birlas were bankers, traders and speculators before they became industrialists. b. Dalmia, who made his fortune in the Calcutta bullion market in 1917 by speculating on the rise of the silver prices in London built up an empire in sugar, cement, and paper during the 1930s at the same time continued large scale speculative operations. c. Karamchand Thapar was a big coal trader in Calcutta before he entered the coal, paper and sugar industries in the 1930s. d. Lala Shri Ram, the cotton textile and sugar magnate of Delhi, belonged to a family which had made its fortune in the Commissariat by supplying the army during the ‘Mutiny’. 32  e. Walchand Hirachand was a building contractor in Sholapur who established a big construction business during and after the 1st WW and then went into shipping, sugar and engineering. 11. A common characteristic of these trader-industrialists was the continuation of bazaar transactions and speculations while expanding into the modern industrial sphere. It is instructive to note in this context that some of the Westernized Bombay textile houses which had moved away from the bazaar came to grief in the 1930s, while bazaar industrialists prospered in the smaller and the more indigenous types of textile towns. 12. To sum up then: a. As the upcountry buying and selling organization of the European dominated organized sector folded up with the onset of the Great Depression, i. Indian bankers, merchants and speculators who sustained the spot and forward transactions between the colonial ports cities and the market towns of the vast interior achieved an integrated organization over the subcontinent. ii. The better concentration and organization enabled them to increase their participation in mill industry and export trade perceptibly, so that the organized modern sector itself came to include at the end of 1930s a substantial element of men who had risen from the Bazaar. b. It must be emphasized, however, that bazaar industrialization within the walls of the sheltered domestic mass market had strict limitations. i. Because of the poverty of the masses, their purchase capacity was limited, and because of the underdeveloped state of the economy, ii. the demand for the technologically sophisticated products of the capital goods industry (practically non existent until the 2nd WW) was narrow. c. However, it was possible to effect some advance by substituting imports in those industries which did suffer severe competition from abroad, and this was done in the 1930s. i. There was, for instance, a burst of investment in the sugar industry between 1931 (the year in which protection was given) and 1936. ii. But as imports fell off, so did profits and fresh investments. This is not unexpected, without an increase in per capita consumption, the industries advancing by import substitution were bound to hit a ceiling