THE NEW DEPARTURE IN INDIAN

FINANCE.

THE year 1879 will not improbably be long referred to as the commencement of a new epoch in Indian finance. Until quite lately the true financial condition of India had never been officially recognised. Liberal and Conservative Governments had not only persistently denied that there was anything in the state of Indian finance to cause apprehension, but year after year, as the time for the introduction of the Indian Budget recurred, her actual financial condition was depicted in roseate hues, and her future was described in a spirit of increasing hopefulness. So little cause was there said to be for uneasiness or alarm, that the Indian Budget used always to be postponed till a period of the session when all other important business had been disposed of. When the Budget was considered, it was little more than a repetition of an oft-told tale. By classing some branch of expenditure as extraordinary,' and by regarding some outlay as exceptional, the Indian accounts were almost invariably arranged so as to exhibit a surplus. The public works expenditure was habitually compared to the profitable investment of capital by a wise and beneficent landowner in the improvement of a judiciously administered estate. A most significant change, however, has lately occurred. A large portion of the outlay on public works is now officially admitted to be most unremunerative; and the Finance Minister, Sir John Strachey, has been forced to admit that a review of the finances of India for seven years, a period long enough to show their normal position, 'made it plain that we possessed no true surplus of revenue over expenditure to cover the many contingencies to which a great country is exposed.' Events which have recently happened only too clearly show that contingencies which may put a severe strain upon the finances of India may at any moment occur. When, a few months since, the war with Afghanistan was concluded, and the Treaty of Gundamuk was signed, there seemed some reason to hope that India might enjoy a period of peace and repose. It now, however, appears that the fanatical fury of a dissolute monarch may lead to another Burmese war; and the revolt at Cabul, by necessitating the renewal of hostilities in Afghanistan, involves an increase of expenditure, and may, if the greatest care and prudence are not shown, make a most serious permanent addition to the military expenditure of India.

In order still further to show the striking change of tone recently adopted by those who are responsible for the government of India, it is particularly worthy of remark that the Viceroy and the Secretary of State now unreservedly accept the conclusion that the limit of taxation has been reached in India, and that it has consequently become imperatively necessary that expenditure should be reduced. In a despatch which has been lately issued by the Viceroy and his Council to the local Governments, it is declared that immediate measures must be taken for the reduction of the public expenditure in all its branches.' On behalf of the Secretary of State it has been with equal positiveness announced that the balance between revenue and expenditure must be restored, not by the imposition of new taxation, but by a large reduction of expenditure.' It is impossible to overestimate the importance of so full and frank a recognition of the real financial position of India. It is not too much to say that one obstacle which stood in the way of all attempts to reform Indian finance has now been surmounted. All experience, however, shows that any Government that is determined to carry out a policy of rigorous retrenchment will find itself beset by the most formidable difficulties. Devoted friends of economy in the abstract not unfrequently become its bitter assailants when the particular economy proposed happens to touch some branch of expenditure in which they themselves, either from pecuniary or philanthropic motives, are interested. Whatever may be thought of the previous mismanagement of Indian finance, nothing can be more useless than to indulge in vain regrets and recriminations about the past. Accepting unreservedly the promises which have been given that in the future a different policy shall be pursued, no effort should be spared to strengthen the hands of the Indian Government by rendering them every possible assistance in effecting those reductions in expenditure which they are now so absolutely pledged to secure.

From the reference that has just been made to the opinions recently expressed by the Governor-General and the Secretary of State, it not only appears that the necessity of immediately obtaining a large reduction of expenditure is fully acknowledged, but it can be shown that this reduction is a matter of such urgent importance that no excuse can be put forward to justify even its temporary postponement. In the memorandum of the Governor-General from which I have already quoted, it is stated that rigid economy in every branch of the public service is, in present circumstances, the policy which must be followed. . . . No fresh establishments must be entertained; no new offices must be created; no new works which it is possible to postpone must be commenced.' And now it may be naturally asked,

what are the circumstances which have induced the Government to adopt so entirely new an attitude with regard to Indian finance? As See speech of Mr. Stanhope in introducing the Indian Budget, May 22, 1879.

previously remarked, until quite lately, instead of a large reduction of expenditure being peremptorily insisted upon, expenditure was year after year permitted to increase without apparently exciting even a semblance of uneasiness. For some time past it has been the settled policy of the Government to borrow from four to five millions a year for the construction of public works. Now, the importance of curtailing this outlay is so fully acknowledged, that sanction has been given to the most drastic measures of retrenchment. The amount to be borrowed for public works is in no single year to exceed 2,500,000l., and this limit is not to be exceeded even if its maintenance should involve the necessity of suspending works which are already in process of construction. It need scarcely be remarked that it would have been far better if this awakening to the real position of Indian finance had not been so long delayed. The difficulties of carrying out a policy of economy are indefinitely increased, if such a policy has suddenly to be introduced where before there have been carelessness and extravagance. However desirous the Indian Government may now be to reduce expenditure, they will find themselves perpetually hampered, and their efforts to save money constantly thwarted by the effects of past lavishness still continuing in operation. If costly establishments have been allowed to grow up, a large part of the expense which their maintenance involves will have to be borne long after it has been decided that these establishments shall be reduced. When a government finds that there are more persons in its employment than there is work for them to do, it cannot suddenly dismiss them without any compensation; pensions on a liberal scale have to be granted; and these pensions will for some time absorb a considerable part of the saving which may be ultimately secured. As an illustration of what has just been stated, it may be mentioned that the Government hope during the present year to obtain in the civil departments a reduction of expenditure which will amount to 1,000,000l. a year. A considerable part of this reduction, however, must be regarded as prospective, for the Governor-General admits that there must be a serious set-off on account of pensions and other forms of compensation to the officers with whose services it will be necessary to dispense.' Without desiring to make any unnecessary reference to errors that have been committed in the past, I think it is important to lay special stress upon the fact that the results of a policy of laxity and extravagance will cause a severe drain upon the resources of a country, long after such a policy has been replaced by one of the most rigorous economy. The special circumstances which are now imposing so severe a strain upon the finances of India may to a great extent cease to exist. If this should be the case, the necessity for care and thrift appearing not to be so pressing as it now is, the Government may drift back into its old course, and the present zeal for economy may pass away. The fact, however, should never for a

moment be lost sight of, that new contingencies may arise; these may suddenly create financial difficulties as serious as those which now have to be encountered, and these difficulties will be indefinitely increased, if, in addition to the actual needs of the day, there has to be met in a season of adversity a considerable portion of the expenditure sanctioned in more prosperous times.

In endeavouring to give an explanation of the causes which have produced the present remarkable change in the official view of Indian finance, it will not be necessary to attempt to apportion the exact amount of blame, which may be fairly laid to the charge of successive governments, for having so long and so persistently given an inaccurate account of the financial condition of India. No useful end can be served by embarking on such a controversy. It may, no doubt, be fairly argued that some of the circumstances which, at the present time, are so prejudicially affecting the finances of India, have only recently come into operation; it would not, however, on the other hand, be difficult to show that for years past India has had no financial reserve, and that additional expenditure has consequently had to be met either by increased borrowing, or by imposing fresh taxation most burdensome to the people. But however greatly we may regret that those who have been responsible for the government of India should, during so lengthened a period, have administered her finances in a manner which has brought her to the brink of the gravest financial embarrassment, yet it may now be regarded as a subject for the most sincere congratulation that the peril of the situation has at last been recognised, and that efforts are to be made which, if steadily persisted in, will place her finances on a sound and satisfactory basis.

In enumerating the causes that have produced the striking change of opinion with regard to Indian finance to which reference has been made, chief prominence must be given to the four following circumstances, which I will proceed separately to consider :

1. The necessity of providing for famines out of ordinary revenue, and the character of the new taxation which had to be imposed for the establishment of a famine fund.

2. The increasing loss by exchange.

3. The necessity of providing for the cost of the Afghan war by borrowing.

4. The unremunerative character of a large portion of the expenditure on public works.

With regard to the first of these causes, it may be mentioned that at the close of 1877 the Finance Minister, Sir John Strachey, in view of the fact that in twelve years four famines had occurred in different parts of India, most wisely came to the conclusion that famines. could not be treated as events of an exceptional character; but that, as they were certain to recur, the money which had to be spent in

famine relief ought to be provided out of the ordinary revenue of the year. As the amount which had been expended in the two most recent famines, namely, those in Bengal and in Southern India, had been more than 15,000,000l., he calculated that it would be necessary to provide out of ordinary revenue 1,500,000l. a year for the purposes of famine relief. It is supposed that if this sum is devoted to the reduction of debt in years when there are no famines, the debt might be reduced by an amount equivalent to the addition which has to be made to it in famine years, and thus the relief of famine over a series of years would involve no augmentation of the debt of India. But at the time when it was determined to devote this 1,500,000l. a year to the creation of a famine fund, the ordinary revenue was barely sufficient to meet the ordinary expenditure. As there was no surplus out of which the money could be provided, and as no material reduction in expenditure was attempted, it became absolutely necessary to obtain the larger portion of the money that was required by additional taxation. Of the 1,500,000l., the sum which had to be provided by new taxation was 1,100,000l. It must, in justice to the Government of India, be assumed that before deciding as to the particular way in which this 1,100,000l. should be obtained, the entire fiscal system of India was most carefully reviewed, with the object of ascertaining what new tax could be imposed, or what existing tax could be increased with the least hardship to the people. It was ultimately decided that about two-thirds of the amount required should be procured by the imposition of a license tax. Starting with the assumption that the Government came to the deliberate conclusion that the license tax was the best and most available means of obtaining comparatively so small an addition to the revenue as 750,000l., it will only be necessary to describe the nature and the incidence of this tax, and to refer to the deep discontent which the levying of such a tax is already producing among the people, in order to show with striking distinctness how nearly the limits of practicable taxation in India have been approached, and what incalculable evils may be produced, if, either from laxity or from any other cause, it should become necessary again to impose additional taxation in India. The license tax as now levied is virtually an income tax of about fivepence in the pound imposed upon all those who derive an income from trade or from skilled labour. Professional and official incomes are entirely exempted from the tax. The Governor-General with 25,000l. a year, the officers in the army, the well-paid civilians, successful barristers and doctors do not contribute a farthing to the tax, but it is levied from every petty trader and every handicraftsman, although their scanty earnings may amount to no more than 48. a week. But the inequality of such taxation and the severity of the burden which it imposes on those who are so poor that their income is only 10l. a year, may be regarded as by no means the most serious