introduction from financing india's imperial railways

8/6/2019 Introduction From Financing India's Imperial Railways

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INTRODUCTION

By 1908 Britain had invested £274 million o capital in Indian railways, mak-

ing it the largest single investment programme ever undertaken in the BritishEmpire.1 Railways made up 80 per cent o Britain’s industrial investment inIndia, relying on Indian taxpayers to und construction and early operations.Te size and prominence o this public works project has prompted a continu-ing scholarly debate on the motivation and results o Indian railways, since LordDalhousie’s original railway minute o 1853. However, most o the analysis hasocused on the earlier period o railway construction up to 1875. Like muchhistoriography o the colonial Indian period, analysis has been characterizedby subjective responses to British Imperialism. For example, Daniel Torner’s

work on government provision o early Indian railway guarantees comple-mented Indian nationalist writing on railways, as part o the ‘drain’ debate. o

be air, Torner was sensitive to the di culty o pursuing development policiesin British India given the political landscape at Westminster. Aer all, the IndiaO ce was not unique in guiding colonial enterprise towards dependence onmanuacturers and nanciers at the metropole. In contrast, the ‘new Imperial-ist’ scholars, reinterpreting British railway policy as liberal, sensible and benignhave ignored the most compelling aspects o Indian nationalist critique. Dutt,Naoroji, Ranade and Wacha may have overstated their case at times, but thecomplaint that Britain pursued railways in isolation rom other legitimate devel-opment concerns has never been rebued.2 Te opportunity cost o railways, ina balanced budget environment, in terms o irrigation, sanitation and educationexpenditure oregone was considerable.

Indian railways have been criticized or absorbing more than their air share

o India’s tax receipts. Tey have also been seen as stifing industrial develop-ment and wealth creation in India. It is true that nationalists underestimated thechallenges in converting India’s eighteenth-century artisan textile businesses into

western-style industry. Nevertheless, India’s industrial stagnation in the nine-teenth century is an awkward act or apologists o Empire. Te British neglecto Indian industry aer the all o the Company is beyond debate, but the extentto which this was understood to place limits on India’s growth potential is still



2 Financing India’s Imperial Railways

discussed. Even Keynes had seen the terms o trade moving in avour o India’sagricultural base over time.3 Modern globalization theory has stressed the ben-ets o rigorous international specialization. Victorian railways in India wereconstructed to accelerate that process but, uniquely, India became a major rail-

way power without beneting rom the normal accelerator and multiplier eectso capital investment. Te cataclysmic amines o the 1870s and 90s were themost dramatic evidence o the ailure o the Raj to create economic growth andcombat extreme poverty in India. Over 1875–1913, or example, China gener-ated comparable economic growth to India, without a railway network, whileboth countries underperormed the average or developing nations.4 At the

same time, the British ocus on overseas capital exports, o which Indian railwaybonds and equities made up a signicant share, created longer term problems orthe UK economy, which suered rom the opportunity cost o capital directedat ‘rentier’ empire pursuits, rather than new domestic industries like electricity,chemicals and motor cars.5

During the late nineteenth century the British were prepared to questionthe benets o rail investment at public committees and commissions. However,by 1909, in a memorandum detailing the achievements o the Raj in the hal-century since the Mutiny, sel criticism had ceased. Railways were emphasizedas one o the great achievements o the period since the abolition o the EastIndia Company (the Company). Aggregate gross earnings were £30 millionand the benets o the railways were estimated at a spectacular £100 million per

annum, incorporating savings in transport ares per mile travelled but excluding additional benets o spared time. Te railway network employed some 525,000

people o whom 508,000 were Indians. Railways had produced a return that yearo 4.33 per cent. Like modern scholars o the Imperialist school, the report ailedto consider alternative uses o the enormous capital expended. Indeed, the report

pointed to returns o some 8 per cent on more recent irrigation expenditureon an aggregate capital programme o only £32.5 million. Tese were returnsunheard o in the Indian railway sector, outside the Bengal regional monopoly,the East Indian Railway (EIR). Te India O ce/GOI had over previous yearschannelled ten times as much capital into the lower yielding railway businessin a policy which ignored considerations o market-based returns. 6 One aim o this monograph is to explain the strength o support or this railway investment

programme across large sections o British decision-makers without resorting toa partisan view o the rights or wrongs o the project.7 o do so it is necessary tolook in detail at debate surrounding the three rationales used by the British to

justiy prioritization o Indian railways: trade and commerce, amine protectionand relie, and military/strategic benets or the deence o India. Te triumvi-rate o early rail enthusiasts, W. P. Andrews, Macdonald Stephenson and JohnChapman used all three aspects in promoting Indian rail projects. 8 Tese three



Introduction 3

rationales provide a helpul ramework or interpreting the period aer 1875 when similar arguments persisted.

Te commercial rationale or railways had been called into question by 1875.Te rst generation o government-guaranteed companies, with the exceptiono the EIR and Great Indian Peninsula Railway (GIPR), had ailed to meettheir 5 per cent guarantees and absorbed large GOI subsidies. Tis prompteda shi to direct state unding under the Liberal Viceroy Lawrence, a decisionreversed in the early 1880s in an attempt to move railways o the government’sbalance sheet. Te second generation o guaranteed companies provided ampleopportunities or City underwriters, nancial advisors, stockbrokers, rail pro-

moters, managing agents/traders, shippers and insurers to generate serviceindustry revenues. Tis was achieved in parallel with large manuacturing ordersor locomotives, wagons, steel railings, steel lines, bridge contracts and gen-eral engineering products. Te extent to which Indian railways could act as acounter-cyclical source o demand during the ‘great depression’ o the later nine-teenth century was much discussed at the parliamentary commission hearingson the depression o trade. She eld, Glasgow, Manchester and London Cham-bers all had signicant representation in parallel with the Indian chambers. Tebook will attempt to disentangle these dierent interest groups, to draw con-clusions on the relative strength o service industry and manuacturing lobbies.Tis should contribute to the active debate on gentlemanly capitalism which hasdeveloped in recent years.9

Given that India made up over 80 per cent o the population o the BritishEmpire by 1900, Cain and Hopkins made clear that ‘no plausible explanation o the purpose o empire-building can aord to stumble over the sub-continent’. 10 Tis makes the sub-continent’s largest industrial project central to any critiqueo the ‘gentlemanly capitalism’ paradigm. Indeed, Dumett criticized the lack o attention paid by the two authors to railways and shipping across the BritishEmpire. He saw their reerences as ‘brie ’ and argued that the writers ailed tolink transport technology to ‘the wider industrial revolution’. Further, he ques-tioned positing a close relationship between the City and politics, apart romthe prominent Bank o England/reasury relationship (where the requirementso public unding brought them together). Tere was a lack o ‘representativeexamples’ where City people had demonstrably infuenced ‘overseas politi-

cal, military and naval operations’ or ‘the building o new colonies and theextensions o empire’.11 Indian railways provide a test case or these gaps in gen-tlemanly capitalism’s historiography. Equally, scrutiny o British manuacturing lobbies, which pressed railways, should allow consideration o Clive Dewey’s

view that manuacturing infuence in British India was declining by the late Vic-torian period. Dewey argued that the ‘eclipse o the Lancashire [cotton] lobby’could be traced back to 1870. Lancashire’s success in overriding ‘inant industry’




protection or Indian textiles was said to disguise longer-term weakness. Tisrefected the ‘decline o the provinces in British politics, and the emergence o a highly-centralized class-based political system’, in line with Cain and Hopkinsassertions.12 Tis was a bold statement which would be strengthened i the larg-est Imperial industry was seen to benet only British service industries. Further,the overwhelmingly Greater London investor base or the bonds and equitiesoriginated by Indian railway companies may give support to the Cain and Hop-kins emphasis on the middle-class elite o the South East o England. Certainlythe demographics o that investor base diered rom the non-guaranteed Brit-ish railway companies up till the 1840s, which had attracted savings rom the

regions where they were located.

13

Te trading and commercial aspects o Indian railways occupy a central position in the debate about ‘economic imperialism’.14 W. J. Macpherson tooka benign view o the infuence o British commerce and nance on the IndiaO ce and GOI, including public lobbying by the ‘cotton barons’. He largelyignored the inormal advisory arrangements between prominent bankers andthe India O ce, and lobbying activity by Indian Chambers o Commerce. LikeDewey, Macpherson was sceptical o the infuence o manuacturers on the dualgovernment. While steel railway lines and sleepers became an important sourceo demand or British manuacturers he concluded that ‘the output o the ironindustry, whether British or Indian, was an eect rather than a cause o the con-struction o lines in India’. He could detect no bias in the tendering process in

avour o British manuacturers, and argued ‘i anything the bias was towardsIndia, but price was the ultimate determinant’. In short, Macpherson rejectedaccusations o ‘economic imperialism’ in Indian railway administration, seeing little evidence o eorts ‘to exploit the ryots’. He gave an exhaustive descriptiono ‘the new issue market or Indian railway securities’ but little insight into theadvisory unction o City bankers. He was satised that the underwriting eescharged on debentures and stocks were reasonable, highlighting the tendencyto distribute stock to existing shareholders and so dispensing with underwrit-ers altogether. In support o this contention, he quoted F. Lavington who hadcharacterized railway investors as being motivated by steady returns rather thanspeculation.15 Macpherson’s research ocused on the earlier period up to 1875but, beyond that, the volume o construction and nancing increased, making

the stakes or British suppliers greater. Similarly, the extent to which oreign competition could expect to win manuacturing and nancing business heightenedas other countries industrialized and competed more eectively with Britain.Hence, Macpherson’s assertions about the impartiality o the dual governmentin allocating contracts demand added scrutiny in the period beyond 1875.16 It issurprising that the period o ‘High Imperialism’ has received so little attentionin the historiography o Indian railways.




ignores the more consistent public health concerns in colonial India. Ira Kleinattempted to widen debate on the ailings o British inrastructure in improving sanitation and disease control. Statistics in Northern India rom the rst censuso 1871, or example, showed stagnant population due to a rising death rate. Tedeath rate reached an unprecedented 5 per cent by 1908. oo much ocus onamine outbreak risks diverting attention rom the role o railways in disrupting ‘traditional socio-economic institutions … hampering older modes o agrarian

production, and … impoverishing the soil’. In 1905, or example, by which timethe Raj boasted that amine had been eradicated, Klein pointed to ailed crops,25 per cent price rises, and amine/disease related death rates comparable to

that suered in 1879. Within two years, wheat prices had risen by a urther 50 per cent, and had pulled up prices o cheaper grains to worsen disease-relatedmortality rates in the region.21 In contrast, the Raj’s 1909 memorandum stressedthe immunity o the Central Provinces and United Provinces to the droughto 1907, where higher grain prices had improved peasant wealth, allowing theavoidance o another catastrophic amine. Te Raj tended to view high prices asrefective o a buoyant agricultural sector, perhaps as a rebu to Dutt’s accusa-tions o overbearing land assessments.22 O cials’ inability to trace links betweenrailway development in isolation, high prices and general susceptibility to am-ine and disease needs urther explanation. It also encourages consideration o the extent to which British policy was underpinned by Malthusian atalism onthe prospects or India’s supposed population problem, notwithstanding the

static population over those years.23

Te third rationale or Indian railways, the military and strategic benetsin the deence o India, was emphasized by W. J. Macpherson in the periodaer 1870.24 Te experience o the Indian Mutiny, coupled with increasing ten-sions on the North West Frontier was said to have reinorced the requirementor railways to despatch troops and materials rapidly. Railways had become thetechnology o choice or military strategists by the 1870s, based on experiencein the American Civil War and Franco–Prussian War. However, it is ar romclear how the thinking o Friedrich List and Prussian General Von Moltke wasabsorbed by the India O ce and Calcutta. Te expense and engineering chal-lenges implied in constructing even narrow-gauge railways into the Himalayas,to meet the challenge o Russia rom Central Asia, presented great di culties

or military planners. It was evident that the low cost military railways builtby the Russians were not achievable by the British on the North West Fron-tier. However, the deence o India placed British military planners in a theatreo war akin to continental wars. Tis made India less suited to the traditionaldominance o the Royal Navy. Te British Army was constrained by lack o conscription and the requirement, post-Mutiny, to shi away rom native troopconcentration. Railways may have been the most suitable solution to the unique



Introduction 7

challenges o Russia’s railway capacity, but the existing historiography ails toexamine the method by which this came to be accepted. Te quality o Brit-ish strategic analysis o Russia’s ranscaspian and Orenburg–ashkent Railwaysrequires consideration. Not all observers were convinced that Russia could read-ily turn her Central Asian network into a platorm or an invasion o BritishIndia. Indeed, by 1904 the shortcomings o the ransiberian railway or Rus-sian troop movements were evident or all to see against the Japanese. However,even aer the Anglo–Russian concordat o 1907, military railway expenditurein India continued at a high level, casting doubt on whether Russophobia ullyexplains the phenomenon. Certainly, British India’s strategic position was com-

plicated by the ‘buer states’ in the North West (Aghanistan and Persia) andNorth East (Burma). Railway strategy in these states appeared to dier according to the attitude o indigenous rulers and the opposition o local tribes. Relation-ships between Britain and Russia, as the Great Powers, and buer states need tobe dissected, to understand the dynamics o railway building. Te enthusiasts orrontier railways oen pressed the commercial and trading benets o these linesas added benets though the commercial attributes o Aghanistan, Baluchistan,Persia and Burma were doubtul. It is reasonable to ask whether the construc-tion pattern represented an early version o what Eisenhower would much laterchristen the ‘military industrial complex’. Te role o energetic military railway

planners in the ICS and India O ce warrants urther examination. Tey gaveevangelical sponsorship to private guaranteed strategic lines, then the consoli-dated/nationalized North Western Railway, the largest loss-making institutionin Indian railway history.25

Tis thematic analysis is intended to explain the single-minded investment policy in railways pursued by the dual government, despite anti-railway agita-tion by nationalists. Indeed, Ambirajan identied unanimity in British India’s‘interest in the construction o public works and utilities’, but dierences over‘execution’ o such policy. Tis ‘execution’ overlapped with o cial’s ideologicalattachment to ‘laissez aire and Classical theory o economic policy’.26 In assess-ing the practical implementation o policy, it is helpul to examine case studieso specic Indian railway companies spanning the spectrum o the private to the

public sector. Tis approach serves to identiy common ideological themes in

the nancing and management o companies, and elucidates the extent to whichthe process was more arbitrary and chaotic. India operated without a writ-ten constitution and with limited regulation rom Westminster, so one mightexpect o cials in Calcutta and Whitehall to have operated with discretion. Tismight not lead to corruption in dispensing contracts and concessions, but wouldinvolve challenges or modestly remunerated government o cials dealing with

powerul and well unded counterparts in the private sector.




Te hybrid ownership and management o guaranteed railway companies, with private London boards tempered by India O ce appointees, make them asuitable case study or examining the workings o India’s early mixed economy.Te debate and negotiation between government o cials, railway promoters,nanciers, lobbyists, railway executives, diplomats and provincial representativesmight be expected to reveal much about the consistency and transparency o

politics and business. Te process was dynamic with government accounting and administrative rules changing over time, oering opportunities or nim-ble traders, manuacturers and nanciers to benet rom links to governmentand inormation on the tendering process. Private papers at the India O ce

Library, and elsewhere, should give insight into the intimacy o these relations.In the detail o deals negotiated it is possible to assess the benets that privateindividuals extracted rom these relationships. echnical expertise might allowinormal advisory unctions or nanciers and managing agents, or membershipo government commissions on railway matters, and related currency, amine,trade, military and expenditure orums. Tis area o research has attracted lit-tle attention in the ‘gentlemanly capitalism’ debate. A representative study o Indian railway companies gives insight into the preponderance o these ‘experts’on the board and share registers o businesses. Te tendency or ex-o cials toswitch rom ‘gamekeeper’ to ‘poacher’ prole will be examined. Te case studiesare intended to cover a substantial share o the asset base o Indian railways, adiversity o private/public ownership/management structures, and a geographic

spread across regions touched by railway development. O course, the choicesare partly constrained by the availability o research material to recount the com-

pany’s narrative in su cient depth.27

In presenting a picture o the largest Empire investment programme overa period o almost orty years, the underlying political, strategic and nanciallandscape o Britain and her Empire impinges. Tis was a period o relative eco-nomic decline or Britain. Te so-called ‘Great Depression’ o the 1880s, when

price defation a icted domestic consumer condence, made export marketslike India more important or British industrialists. SB Saul has identied thecentral position o India as a customer or British manuactures and services/capital, and a rojan horse or exports into protected markets like France andUSA.28 Railways played a prominent role in acilitating this oreign trade on

British terms, but suered rom London’s need to administer India without netBritish contributions. Te costs o the Second Aghan War and the annexationo Upper Burma, coupled with declining opium revenues and arguments withManchester over the legitimacy o Indian tari revenues, put pressure on the

Viceroy’s Finance Member to balance his books. While House o Commonsscrutiny o administration remained slight, the requirement o the Secretary o State to lay beore Parliament an annual budget statement or India created some



Introduction 9

check and balance. Te Indian railways present a clear picture o early attemptsby government to nance and manage businesses within draconian budget con-ditions. O balance sheet nancing structures resemble modern governmentnancing methods, like Private Finance Initiatives in health and education. Itis important to understand the extent to which creative public accounting was

viewed as controversial at the time.29 Equally, Indian railways wrestled with manyo the same problems o pure private British rail companies operating in markets,

where damaging price competition could undermine nancial integrity anddeliver poor value to both shareholders and customers.30 Te case studies shoulddemonstrate the extent to which industrial combination and regional monopo-

lies were courted by Indian decision-makers, paralleling moves towards railwayamalgamation in Britain. At the same time, the lack o democracy amongstIndian taxpayers made the advent o a railway rates controversy comparable tothat in Britain unthinkable. Further, more covert methods o state support or

joint stock companies need to be examined. Critics o the time, like Sir GeorgeCampbell, saw the companies as beneting rom multiple gold plating providedby the India O ce. Case studies should serve to clariy the existence o gov-ernment subsidies, regional monopolies, land gis and o-market acquisitions.

Widespread eorts to disguise state support would suggest greater requirementsamongst government o cials to maintain a açade o laissez-aire. Tis has beena controversial debate or scholars, with the extent o British India’s adherenceto ree markets much disputed.31 As ever, the particulars o nancing discussions

bring these pressures most clearly to the ore, as o cials wrestled with nancing and renancing deadlines.

Finally, the scale o the Indian railway project, in the context o malleablelaissez-aire, gives a unique insight into the extent to which late Victorian Indiarepresented a meaningul rst attempt at a national development plan. In the1850s Marx had highlighted the potential o railways to create a more dynamicIndian economy, warning o the risks to Britain in creating something o a‘Frankenstein’s monster’. He predicted in the 1850s that railways would encour-age Indian assertiveness since ‘when you have introduced machinery into thelocomotion o a country, which possesses iron and coals, you are unable to with-hold it rom its abrication’.32 However, in reviewing Indian railways, Ambirajan

was sceptical about the coherence o the Raj as a platorm or development. He

argued that ‘development’ policy was exclusively targeted at agriculture and ‘wasto be achieved through individual initiative without direct government assis-tance’. Public works were to combine with legal and monetary systems, businessentrepreneurs, and education as a platorm or agriculture-ocused governmentassistance. However, departures rom laissez-aire in Smith and Mill allowed‘carte blanche to the Raj’ with pursuit o development where it wished.33 DanielTorner went urther arguing that London-listed Indian railway companies had




ignored considerations o development since it was ‘simply not their concern’.He expressed sympathy or ellow American Leland Jenks’ assertion that in theirrst seventy-ve years, the Indian railways had ‘destroyed more occupationalopportunities than they opened’.34 Torner saw a deliberate eort to maintainthe ‘buy British’ approach towards railway equipment, which explained part o the underperormance o the Indian economy. Tis was acilitated by the charg-ing o low reight rates on Indian exports to ports and British exports rom Indian

ports. Te policy was aimed at deepening ‘the country’s economic dependenceon the United Kingdom’.35 More recently, irthankar Roy pressed the legacyo the railway network bequeathed to India as representing a valuable resource

or uture economic development, but characterized the British motivation orbuilding the inrastructure as ‘governance rather than development’. Te govern-ment’s share o the Indian economy by the early twentieth century was only 5

per cent, meaning economic growth was still overwhelmingly dependent on the private sector (primarily agricultural).36

In reviewing British railway policy over these years it will be possible to assessthe extent and sophistication o British development policy in India. JulandDanvers as India O ce Public Works member, or example, was pressing inthe 1860s to have more rail material produced in India, but the shi to Indianrailway line and locomotive manuacture never really occurred. Te Britishmaintained a control o railway equipment manuacture in their ‘ormal’ IndianEmpire, in a manner which they ailed to achieve in ‘inormal’ Argentina.37 By

the rst committee dedicated to Indian rail nance in 1908, Danvers’s ambi-tions had been suppressed. A study o individual companies, their nancing andgovernance may give insight into the abandonment o industrial development,as a policy pursued even indirectly in India. Moreover, the activities o JamesMackay and his managing agent/City associates at the railway-related commit-tees should give more colour to the view that there was a consistent oppositionrom business to government development. Te role o James Mackay, himsel,in participating in dierent Indian council committees and chairing the 1908railway committee demands attention. Scrutiny o his committee, and the extentto which he was able to choose members/witnesses and choreograph events,should reveal much about the extent o the India O ce’s development ambi-tions and the dominance o commerce/trading elites up to the end o our period.

While Dewey presented Mackay as a bastion o business independence, whoopposed Curzon’s ‘new industrial policy’, his activities on Indian railway nancemay suggest a more symbiotic relationship with Whitehall.38

Te Mackay railway committee supported the continuation o London-based boards, managing railway assets rom a distance o 6,000 miles albeit

with India O ce intererence on overall capital expenditure budgets. JohnStuart Mill had questioned the e cacy o shareholders holding management



Introduction 11

to account in the context o mid-Victorian joint stock companies (the modern principal-agent problem). Te extent to which guaranteed London shareholdersin Indian railway companies could really be expected to maintain private-sec-tor discipline on ex-ICS/India O ce railway directors must be open to doubt.Again the activities o these executives in the practical running o their com-

panies will add to this debate. Mackay and ellow committee members like SirDavid Barbour doubted the capacity o Bengali or Bombay entrepreneurs to runrailway companies, even as Acworth positioned the industry or nationalizationin 1921. Te veneer o private-sector e ciency and shareholder accountabil-ity, which the hybrid nancing arrangements allowed, gave these businessmenimmunity to criticism rom government o cials although they shared the same

paymaster in the Indian taxpayer. In the same way that Mill struggled to applaudlaissez-aire in his writings, while providing entry points or government inter-

vention in almost any industry, the contradictions o Indian railway policy may well have delivered the worst o all worlds. We must ask whether the accumula-tion o minor scandals and ine ciencies allowable in India’s hybrid companiesrepresented an inerior alternative to a more rational planned approach, pursuedor a time by Viceroy Lawrence. At the same time, the level o scrutiny achievedmay have been just rigorous enough to constrain industrialization through a sti-fing o private sector dynamism. As Clive Dewey characterised the ailings o Curzon’s ‘new industrial policy’:

‘Few countries have ever industrialised…in which entrepreneurs have been unable to

corrupt the state, exploiting taxpayers and consumers ar beyond the limits set by proper tolerance…’39

introduction from financing india's imperial railways

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