The East India Company: The World's Most Powerful Corporation (The Story of Indian Business) (15 page)

The rates of exchange at Canton were favourable enough to make this form of transfer cheaper than sending goods. The Company’s sponsorship enabled the Indian and European merchants to deal with their counterparts, a group of Hong merchants who, ‘with
unity and vigour’, maintained control on the officially outlawed trade. The Hong network helped the Company’s servants and private merchants to protect the opium runners from pirate attacks. Pirates, in turn, were interested in these ships for the silver that they often carried.

The private merchants were not necessarily happy about the complex arrangement. They were technically hired on contract, or agency. That is, they were licensed to trade only between India and China, and the license barred them from trading with Britain. Chinese official injunctions against the Company exposed the private traders to the risk of confiscation and harassment. Steadily after 1813, therefore, the major firms that dominated the China trade grew less dependent on the Company’s protection and began to push for an end to the Company’s monopoly of the China trade, which finally happened in 1833.

From 1833, the Company ceased to exist as a trading body. It existed as an administrator of India in partnership with the Crown. The partnership was an unequal one. The Company’s own Court of Directors still had some say in Indian affairs, but the Board of Control, in which
the government dominated, had far more say in matters of policy. Nevertheless, the Company’s symbolic authority was still recognized in Britain and in India. In Britain, it was acknowledged by business and political leaders that the Company, in making an Indian empire possible, had performed a historic role in the remarkable growth of Britain’s own industrialization. This was affirmed by the emphatically positive vote with which the Parliament endorsed the formal right of the Company to administer India in 1853.

Shortly after the regulating acts were installed, debates and discussions about how to govern India began in earnest. Much research has taken place, and is still taking place, on the Company as a government. Recent writings on the theme—by Sudipta Sen and Philip Stern for example—explore the early ‘discourse’ on trade policy and regulation. Others, such as David Washbrook, have studied law and administration. Without going into this vast scholarship here, it is possible to say that a build-up of infrastructure and institutions enabled the Company to integrate a politically fragmented region into one vast country.

Between 1780 and 1850, for example, the Company set up the most powerful standing army the region had seen, established courts of law and gradually turned its attention away from conquest to governance. Conquest
did not stop, but except the wars in Punjab, was achieved by bloodless means. Significant steps were taken towards canal construction in south India, the building of the railways, the telegraph, and universities. The Industrial Revolution had made India a potentially valuable source of food and raw material. Cotton was already being exported from Bombay to Lancashire in large quantities. If this report card suggests a rapid modernization, the impression is a misleading one. With respect to Indian society, the British administration in India continued to tread cautiously. It had instituted new courts of law, but filled the law books with Indian religious codes. Where possible, it had granted land rights to established peasant clans and landlords. Much of the new infrastructure—the railways, canals, telegraph, and universities—came in late in the 1850s, and represented a new viceroy’s particular vision of India.

Against the backdrop of peaceful inactivity, the mutiny came as a shattering blow. An event that unleashed fury against the British on an unimaginable scale, it caught the rulers of India unprepared. Suddenly the Company was again in the line of fire. Even though the Parliament had acted in concert with every major administrative decision since 1788, the Company was more exposed to public scrutiny than was the Board of Control. When, in December 1857, the government gave a hint that the
Indian empire would henceforth be administered by the Crown, the Company hurriedly commissioned its most able employee, the great libertarian philosopher and economic theorist John Stuart Mill, to write a petition in its defence to be submitted to the Parliament.

Mill’s report was the finest requiem the Company could get. Mill made the case that the Company in 1855 was a far cry from the days of monopoly and corruption. It had won Britain an empire in India, when the Crown had lost one in America. By running a government that left Indian institutions intact and refusing to install British political systems and ideas, the Company provided the most pragmatic form of governance in India. It was the result of an accident of history no doubt, but one that had turned out well, and did not deserve to be replaced. Mill’s petition failed, not least because such arguments, all of them partly valid, could not explain the mutiny.

On 1 September 1858, the Court of Directors met for the last time in their office in Leadenhall Street, and voted unanimously to pass the only item on the agenda, grant of an annuity for John Lawrence, the lieutenant-governor of Punjab, who had played a stellar role in suppressing the mutiny in north India. Exactly two months later came the Queen’s pronouncement declaring British India a Crown possession. By a stroke
of the pen, the administration and the army, hitherto in the employment of the East India Company, transferred to the service of British India. Long before that date, the Company as a business had come to an end.

Playing chess. Painting by Charles Gold, 1791. A rare picture of a social moment shared equally. © British Library Board

THE SIGNIFICANCE OF the East India Company for British economic transition has been the subject of a long-running and lively debate. Its significance for the Indian economic transition in the period 1600-1857 has received less attention. The final chapter of the book rethinks this issue.

It is useful to divide the subject into three parts, effect on business organization; the effect of the Company’s trading operations on economic change in India; and the role of the Company government in shaping economic growth or stagnation.

The effect of the Company on business organization in India is an under-researched subject. Still, two positions
can be distinguished. One of these suggests that by representing rational, forward-looking, productivity-oriented firms, the English and the Dutch ushered in a commercial revolution. They were simply more efficient than the conservative and traditional Indians or the aggressive Portuguese traders. Critics of this view point out that the companies were so heavily dependent on Indian agents, and consequently on customs and institutions already present in the region, that European success cannot be understood with reference to European business organization alone. They advance the alternative view that the task requires a consideration of the highly developed business organizations already in existence in India.

There are problems with both these positions. The former view underestimates the difficulties the companies faced in India and the adaptations and compromises that they had to make. The latter does not allow us to see any institutional effect of European trade at all. In fact, the European and the Indian worlds of business were indeed quite different, and both were affected by the close contact. The outcome of the meeting between these two worlds was not the triumph of one over the other, but the creation of new rules for the game. These new rules enabled trade, but also gave rise to frictions, disputes and unintended results.

The main point of difference between the Europeans—what is said below of the English should apply equally well to the Dutch as well—and the Indians was not one of efficiency, but one of scale. The success of private trade showed that the monopoly firm was not a very efficient business model in the 1700s. And yet, the joint-stock form and the monopoly charter made a major qualitative difference in a world where family- and community-run businesses still ruled supreme. It allowed the Company to operate on a scale of business that was infinitely larger than what the Indian firms would manage on average. The enormously large scale, and the large capital that the Company utilized in India, had no Indian counterpart because the notion of joint stock did not have an Indian precedence.

An unintended result of the huge scale was the extensive use of contractual purchases. This was the real innovation the Company introduced in India, the idea and the practice of contract. Contractual transactions were not unknown in India. Some textile business in domestic overland trade was conducted under contract, though exactly under what terms and conditions remains unknown. Both the Hindu dharmashastras and the Islamic codes dealt with the subject of contract, as the early colonial legislators discovered. But they also discovered that such codes were not much used in
practice, and the effort to make use of religious codes on contract in settling actual trade disputes in the British Indian courts ended in a complete failure. The Indian merchants never expressed a preference for their own religious contract laws. This is not surprising. The association with religion would have made these codes too sectarian to be practically useful, and the codes covered debts better than sales. Be that as it may, contracts on the scale and complexity that the Europeans introduced, involving so many subcontractors and such long delivery time, did not have an Indian precedence. In turn, the difference owed to the very large scale of operations that the company form made possible.

In the beginning, the Company procured what cloth or pepper it could get from local merchants. Spot market sale rather than contractual sale was the norm. Increasingly, it engaged brokers, headmen and contractors to procure goods on long-period contract. Orders involved millions of yards of cloth at a time and involved hundreds of villages. Orders were placed and secured by paying millions of pounds in ready cash more than a year in advance. All of this was backed by the contract form the parties signed on. The documents registered advances paid and specified the quality, design, price and quantity of the goods in detail. Quality specifications, needless to say, were of critical importance when the goods in question were fashionable textiles.

All contracts work on the basis of trust. Somebody advances money. Others promise to deliver a good or a service on time and of required quality. In the absence of a court settling contractual disputes, how would any party ensure that promises would be kept? Indians ensured that promises would be adhered to by confining the most consequential exchanges—credit, land, or knowledge—within the community, and by making the whole community responsible for honest conduct. The Europeans did not have access to either community resources or courts of law in their operations in India. Therefore, principal-agent relations were fraught with problems. Weavers took advances and ran away or short-changed on quality, brokers took bribes from everybody, and agents took advantage of the rivalry between the Dutch and the English and the tensions between the nawab and the Company. Frictions of such kinds formed the staple subject of official correspondence, and showed up in the invectives that the Europeans routinely directed at their closest allies, the ‘Bania’.

The possibility of contract failures was not necessarily bad news for the Indians who had dealings with the Company. Precisely because there was such a possibility, those agents and partners deemed trustworthy were rewarded not only in money but also in status, patronage and power. By 1750, the results of trust and reward
could be seen in the three cities where the Company had established mini-states with its own laws.

The rapid growth of commerce and industry in these three cities owed to a form of Indo-European enterprise that was different from anything that the traditional Indian business system could offer. These cities made the world economy more accessible to the Indians. They reduced the weight of caste and community and made unorthodox alliances possible. The cities, therefore, allowed Indians who had no past exposure to trade to participate in commercial enterprise internationally. They created a freer society where interactions between ethnic groups were considerably easier than in the interiors of India. They introduced cosmopolitanism, the hallmark of urban modernity.

Although as a firm it overshadowed all others, how large was the Company in relation to commerce as a whole?

In the backdrop of the Indian economy as a whole, the European companies taken together were far too small a player to make any difference, good or bad, directly through trade. Their scale of trading operation was tiny when measured against the size of the economy.
The proportion of textile export to the production of textiles has been variously measured. The most generous measure is 10 per cent for Bengal about 1750. My own figure for the share of export in total production of cotton cloth in the Indian subcontinent is 1–2 per cent in 1795. Cloth itself could not have had more than a 10 per cent share in the domestic product. We are then talking about a form of economic activity which did not occupy more than a thousandth part of the economy. The English Company’s own share in that slice of business was about two-thirds. Realizing how small this trade was should quickly settle some unnecessary debates. For example, some historians puzzle over the fact that the ‘large’ inflow of silver did not have much effect on Indian prices, as they did in contemporary Europe. They have attributed this inertia to the fact that the Indians converted a lot of the silver into ornaments rather than coins. It would be simpler to note that the silver inflow was too small in the first place.

If Indo-European trade has received so much attention from historians it is a reflection not of their true scale relative to the Indian economy, but the infinitely richer archival records available on overseas trade, compared with an almost barrenness of data regarding domestic trade. The officers of the English company produced a mountain of records and retained much of it because
they worked for a joint-stock company. They had to explain things to their employers, shareholders, the Parliament and the Crown. The Indian firms wrote their accounts in archaic, mysterious language, fudged the numbers deliberately, and then held these papers close to their chest because these were family heirloom and no business of anyone. A usual lament of the doctoral student in history is the scarcity of business papers of old Indian firms. It is likely that the scarcity does not reflect a scarcity of records as such, but also the persistence of the sentiment that long considered these records a private asset.

Having said that, we would be quite wrong to conclude that Indo-European trade was an illusion sustained by records. It is of course true, as the historian Sushil Chaudhury reminds us, that the significance of overland and domestic trade remains underestimated. But it is also true that the significance of overseas trade cannot really be grasped merely in quantitative terms. Its real importance lay in its impact on business organization, and in this respect, overseas trade had a far deeper and lasting effect than domestic and overland trades. The point needs labouring, because of its implication for political change. The drive to colonize India cannot be understood with reference to how big the business of foreign merchants was; we need to consider instead
how easy or difficult it was to build productive partnerships between the Indians and the Europeans. And I have suggested above that, though large in scale, it was a difficult partnership.

In a more obvious sense, Indo-European trade was undoubtedly important to India. Trade was the handmaiden of empire.

If the effects of the Company on Indian business has remained under-researched, the effects of the early empire on prospects of economic development has become too politicized a subject to lend itself to a dispassionate discussion. The default view, which was engraved in the collective consciousness of the Indians by the nationalist writers, started from the assumption that India had been a prosperous place to begin with. The kings and the nawabs had set up a haven of welfare and enterprise in their domains. The Company defeated these good kings by treachery, and then set out to extract Indian wealth in order to enrich Britain. The money looted and sent home or the tax revenue used for the purpose of trade in the last quarter of the eighteenth century was a politically engineered ‘drain’ of Indian resources. Indians were made poor by these
exploitative but powerful foreign merchants, according to the ‘drain theory’ of Indian poverty.

No doubt the early Company fiscal policy was based on corrupt practices. The allegation of corruption was made back in the 1770s, in the wake of the battle between the supporters of the Company and the anti-monopoly lobby in the British Parliament. Many of the facts cited in present-day history were first employed to make a case for government regulation of Indian administration in the 1770s. Precisely because the whole discourse was political in nature, we need to be careful with recycling the arguments of Edmund Burke, Adam Smith and other contemporary critics.

It is difficult to build a ‘theory’ of Indian poverty on the basis of the corruption of early Company rule. Much of the money that Clive and his henchmen looted from India came from the treasury of the nawab. The Indian princes, ‘walking jeweller’s shops’ as an American merchant called them, spent more money on pearls and diamonds than on infrastructural development or welfare measures for the poor. If the Company transferred taxpayers’ money from the pockets of an Indian nobleman to its own pockets, the transfer might have bankrupted pearl merchants and reduced the number of people in the harem, but would make little difference to the ordinary Indian. The corrupt fiscal practices lasted too
short a time, and involved too little money, to sustain a story of permanent impoverishment. The ordinary Indians were quite poor already. There was little that the Company officers could take from them had they tried.

The drain theory, however, did not confine itself only to the 1770s. In the longer run, the Company government initiated a pattern of economic change in India that involved large and sustained payment for services purchased from abroad. The economy maintained a surplus on the trade account, and a deficit on the services account of the balance of payments. The pattern began in the early 1800s or even before (K.N. Chaudhuri’s work remains the best study on the early history of the balance of payments), and was sustained right through the colonial period up to the early 1930s. This long-running deficit on the service account was also called a drain by the Indian nationalist writers. The implied thesis was that it was a politically engineered payment, more like a tribute, symbolizing India’s abject dependence. Indian economists of an earlier generation debated how large the drain was, and how badly it damaged Indian development.

In the 1970s, Marxist historians offered a reading of the nineteenth-century world economy, in which the empires existed to transfer savings from the poorer
regions to the richer ones. The Company’s state and the drain of money from India were their favourite examples of exploitation and underdevelopment on a world scale. This reading is too simplistic and has largely been discarded. It is true that the empires did sometimes sponsor organized loot of resources, that they did not necessarily work for the welfare of their subjects, and that the world did become more unequal in the nineteenth century. And yet, transfer of savings cannot be established as the mechanism and the cause of inequality. The empires enabled a diverse range of transactions. All transactions involve payments and receipts. It is impossible to separate the legitimate payments from the tributary or exploitative transactions. The Marxist historians did not supply a convincing way to separate the two types of transactions.