CHAPTER VI
LORD MAYO'S FINANCIAL REFORMS
The financial history of Lord Mayo's Viceroyalty divides itself into two parts. The first narrates the resolute stand which, at the outset of his administration, he found himself compelled to make against deficit. The second records the measures by which, after grappling with the immediate crisis, he endeavoured to reform certain grave defects in the financial system, and to bring about a permanent equilibrium between the revenue and the expenditure of India.
When Lord Mayo received charge of the country the financial position stood thus. The conquests and accretions of a century had left behind a British Indian Empire nearly equal in size to all Europe less Russia, with a population of close on 200 millions in our own Provinces, and 50 millions in the Feudatory States. The cost of creating that Empire was represented in 1869-70 by a Public Debt of 102 millions sterling; together with another debt of 91 millions sterling expended on the guaranteed railways and other productive public works. Of the Public Debt, aggregating 102 millions, about 52 millions may be taken as the charges of establishing the British Power in India, and 50 millions as the price of reconquering and reorganising the Empire after the Mutiny of 1857. The 102 millions represented, however, not alone the cost of wars and conquests. For the English in India had to construct for themselves the whole fabric of a civilised government. That material fabric included roads, public offices, barracks, courts, jails, schools, hospitals; and this vast outlay explains in part the frequent financial deficits to which I shall presently refer. The other debt of 91 millions represented the cost of constructing 4265 miles of opened railway, and of defending great tracts from famine by canals.1 The two debts aggregated a capital of 193 millions sterling laid out in conquering, establishing, and organising the British India of 1869-70, the first year of Lord Mayo's rule. The revenue amounted to 509 millions of rupees, then equivalent to over 46 millions sterling: namely 33½ millions of taxation from the people, or about 3s. 4d. per head, and 12½ millions from opium, public works, &c., not of the nature of actual Indian taxation.2
1 To facilitate reference by the reader I take the above figures as given in the Parliamentary Abstract, Twenty-third Number, 1889, p. 300. But in the subsequent and more detailed statements (except in direct quotations from State Papers), I convert the rupee for the sake of accuracy at 1s. 10d., its value at the time. Where my figures seem to differ from those in certain of the Blue Books, the explanation usually is that the Blue Books take the rupee at its nominal value of 2s.
2 For details of this calculation, see my larger Life of Lord Mayo, vol. ii, p. 6: 2nd Ed., 1876.
Alike in regard to the amount of the Public Debt of British India and to the burden of taxation upon the people, the finances of that country may seem to compare favourably with those of almost any State in the world. But a nearer examination discloses a different aspect. Small as were the demands of the Treasury upon the tax-payer, it had been found impossible to augment them to the level required for the maintenance of efficient administration. Several of the highest of our Indian authorities believed that it would be perilous to do so. The half-century which preceded Lord Mayo's arrival in India had presented a long series of financial shortcomings. Of the fifty-five years beginning with 1814-15, and ending with 1868-69, only sixteen had shown a surplus, while thirty-nine had been years of deficit. The total of the surplus amounted to about 12½ millions sterling; the deficits exceeded 75½ millions of pounds. The period immediately preceding Lord Mayo's arrival was, if possible, even more discouraging. The last three years from 1866 to 1869, had left behind deficits aggregating 5¾ millions sterling. This was for 'ordinary' expenditure alone. If we add the outlay on 'extraordinary' (or reproductive) public works, the total excess of expenditure over revenue in the three years preceding Lord Mayo's first Budget amounted to the vast sum of 11 millions sterling.
Nor was the chronic inadequacy of the Revenue the gravest source of disquietude. The Budget estimates, although framed with the utmost care which the then existing system allowed of, were constantly falsified by the results. During the two years from 1867 to 1869 the Budget estimates had shown a surplus aggregating over 3½ millions, while the actual results disclosed a deficit aggregating close on 3½ millions. Lord Mayo was thus called to deal not only with a chronic deficit, but with a financial system which allowed of an aggregate error in the Budget estimates to the extent of 7 millions sterling on the wrong side during the two years preceding his rule.
Lord Mayo found therefore three financial tasks imposed on him. He had first of all to attack the immediate deficit: amounting to 2½ millions in the year immediately preceding his rule. In the second place he had to reform the whole financial system, which allowed of the Budget estimates being annually falsified by the actual results. In the third place he had to devise and to enforce measures of economy sufficiently stringent to place the finances on a sound footing for the future. With how resolute a will he carried out this work, the following pages will disclose. But before entering on that memorable struggle I may briefly exhibit its results. The subjoined statement shows more forcibly than any words of mine what those results meant to India. The three years preceding Lord Mayo's rule had left a deficit of 5¾ millions in 'ordinary' expenditure alone. In the very first year of his rule he established an equilibrium in the finances of India, and produced a small surplus. The three years which followed his reforms left an aggregate surplus of 5¾ millions, and that period of surplus was only interrupted by the Behar famine two years after his death.
Bird's-eye view of the results of Lord Mayo's Financial Administration.
| Years of Deficit. (Before Lord Mayo's arrival.) | Year of Equilibrium. (Lord Mayo's first year.) | Years of Surplus. (After Lord Mayo's Reforms.) |
| 1866-7 £2,307,700 1867-8 923,720 1868-9 2,542,861 ————— £5,774,281 Total deficit of three years reduced to Sterling. | 1869-70 £108,779 (Surplus in Sterling.) | 1870-1 £1,359,410 1871-2 2,863,836 1872-3 1,616,888 ————— £5,840,134 Total surplus for three years reduced to Sterling. |
The four continuous years of surplus which thus resulted from Lord Mayo's measures had only one precedent during the period from 1842 onwards, for which the Parliamentary Abstract gives the returns. That single precedent is found in the years 1849 to 1853, under the rule of the great Governor-General, Dalhousie. Nor has there been any subsequent example of four consecutive years of surplus since Lord Mayo's Viceroyalty down to the present date (1891).
Sir Richard Temple, the Finance Minister, was like Lord Mayo in his first year of office. Warned by the disappointments of his predecessors, Sir Richard Temple framed a very cautious Budget for 1869-70, and estimated for a small surplus of £48,263. It soon appeared, however, that no amount of caution would avail to prevent the falsification of the Budget estimates under the system upon which they were then made up. The first symptoms which caused Lord Mayo alarm was the discovery that the cash balances in the treasuries proved lower than had been estimated by his predecessor. Lord Mayo's anxiety increased as the actual facts of the financial year previous to his accession, 1868-69, became finally known. Item after item turned out worse than had been expected, until the deficit of £889,598, as estimated in March, 1869, grew to the vast sum of £2,542,861, as ascertained from the completed accounts a few months later.
Nor did the disastrous discrepancy appear only in the Actuals of 1868-69. Circumstances occurred to raise a suspicion in Lord Mayo's mind that the same fate might be in store for the finances of the current year, 1869-70. His inquiries led him to order a re-examination of the whole Budget estimates. These estimates, viewed in the light of the actual results of 1868-69, disclosed an inevitable deficit of £1,650,000 for the current year 1869-70, in place of the surplus of £48,263, as announced by the Budget in March. Lord Mayo's perplexities were increased by the circumstance that Sir Richard Temple, after duly delivering the Budget for 1869-70, had found himself compelled to proceed to England on six months' leave. Sir Richard's experience and knowledge were not therefore available at the moment when the Viceroy, in his first months of office, found a new abyss of deficit suddenly open under his feet. Fortunately he had the aid of Mr., now Sir John, Strachey, who was carrying on the duties of Finance Minister during Sir Richard's absence.
The disclosures which the last paragraph speaks of with smooth certitude, revealed themselves in 1869 only glimpse by glimpse, and amid a wide divergence of opinion on the part of the responsible advisers of the Government. It required the resolute exercise of his individual will to enable the new Viceroy to tear the truth out of the conflicting accounts, and to get at the whole facts of the situation. 'I am beginning to find,' he wrote to a friend, as early as May, 1869, 'that our finances are not in as comfortable a state as they ought to be. The enormous distances, the number of treasuries, and the complicity of accounts as between each, render accurate forecasts and rapid information almost insurmountably difficult. The waste of public money is great, and I have been obliged to take strong measures, and say some very hard things about it.'3
3 The Earl of Mayo to Sir Stafford Northcote, 16th May, 1869.
Each week found the Viceroy poring with a deeper anxiety and a graver face over the accounts. As he probed into their hollow places, he found one estimate after another break down beneath his scrutiny. His letters and papers during that summer disclose, scene by scene, and with a painful tension of personal responsibility, the slowly developing drama of deficit; but throughout every line breathes a firm resolve that, cost him what it might in ease and popularity, he would establish and maintain equilibrium in the finances of India. Three months after the letter above quoted, he wrote to Sir Henry Durand: 'I have just received information which leads me to believe that in two items of revenue alone, we may look for a decrease of half a million in the first quarter of 1869-70. Now it is our clear duty to do all that we can to meet this. I am determined not to have another deficit, even if it leads to the diminution of the Army, the reduction of Civil Establishments, and the stoppage of Public Works. The longer I look at the thing, the more I am convinced that our financial position is one of great weakness; and that our national safety absolutely requires that it should be dealt with at once, and in a very summary manner.' 'I should be sorry,' he wrote to the Duke of Argyll, 'to say how much I feel the hard lot that is now cast upon us, to recover the finances from a state of deficit. But unless we have a war, which God forbid, we will do it.'
Lord Mayo mapped out for himself two distinct methods of dealing with the situation. In the first place, he resolved that the circumstances were so grave as to demand immediate measures for meeting the impending deficit without waiting to the end of the Financial Year. In the second place, he determined to attack the permanent causes which had led to deficit, and to prevent their recurrence by a systematic readjustment of the finances.
The first step taken by Lord Mayo and Sir John Strachey was to reduce the overgrown grant for Public Works by about £800,000,—a measure suggested and carried out with unsparing faithfulness by Colonel, now Lieut.-General, Richard Strachey, then Secretary to the Government of India in the Public Works Department. Other Departments, equally important and equally clamorous, had augmented their expenditure at a rapid rate. In fact, the ten years which had elapsed since the dominions of the Company passed to the Crown had seen the administration rendered more efficient in many ways; and the cost of the improvements, however admirable they were in themselves, had in the aggregate become too great for the revenues to bear. In addition to the reduction of £800,000 for Public Works, Lord Mayo found himself compelled to curtail temporarily by £350,000 the grants to the spending Departments which had received so rapid a development during the decade since India passed to the Crown. The whole saving amounted to £1,150,000 during the current year 1869-70.
It became apparent, however, that reductions alone would not suffice to produce equilibrium. Lord Mayo had therefore to decide whether he would permit the Budget arrangements of the year to stand, with the knowledge that they would result in deficit, or resort to the unusual, and in India almost unprecedented, expedient of additional taxation in the middle of the year. He decided, after careful inquiry, that the circumstances demanded the latter course. Had the threatened deficit been preceded by a period of prosperity and financial accuracy, he would not have deemed so severe a policy needful. But the public expenditure had, during three consecutive years, largely exceeded the revenue, and Lord Mayo found that solvency could only be secured, in the first place, by immediate and most stringent measures; in the second place, by a permanent improvement in the finances to the extent of three millions sterling a year. I mean, of course, the aggregate improvement derived from the twofold sources of reduced expenditure and increased taxation.
For these and other cogent reasons, Lord Mayo determined to make it clear by measures of unmistakable vigour that his Government was resolved to place the finances upon a permanently sound basis. He raised the income tax from 1 to 2½ per cent. during the second half of the financial year, and enhanced the salt duty in Madras and Bombay. The former measure was estimated to add £320,000 and the latter £180,000 to the revenue of the year; total, £500,000.
By means of this half-million of increased taxation, and the £1,150,000 of reduced expenditure, Lord Mayo hoped to cover the estimated deficit of the current year, namely, £1,650,000. He thus explained his views to the Secretary of State.
'While the accumulated deficits of the three years ending with 1868-69 have amounted to 5¾ millions, the cash balances in our Indian treasuries have fallen from £13,770,000 at the close of 1865-66 to £10,360,000 at the close of 1868-69, and, notwithstanding our recent loan of £2,400,000, are at this moment lower than they have been at this season for many years. During the same period our debt has been increased by 6½ millions, of which not more than 3 millions have been spent on reproductive works.4 Your Grace has reminded us that successive Secretaries of State have enjoined us so to frame our estimates as to show a probable surplus of from half a million to a million sterling. We entirely agree with your Grace in acknowledging the soundness of this policy. We have no doubt that, excluding charges for Extraordinary Works provided for by loan, our expenditure in time of peace ought to be so adjusted to our income as to leave an annual surplus of not less than one million. The necessary conclusion to which we are thus led is, that nothing short of a permanent improvement in the balance now subsisting between our annual income and expenditure of at least three millions sterling will suffice to place our finances in a really satisfactory condition. How, by reducing our expenditure and increasing our income, we can best obtain such a result, is the problem that we have now to solve.
'We are satisfied that there is only one course which we can properly follow. We must no longer continue to make good the deficit of each succeeding year by adding to the public debt. And we must determine, whatever be the difficulty of the task, that there shall henceforth be no room for doubt that, in time of peace, our income will always be in excess of our ordinary expenditure.'
4 Par. 71 of Despatch to Secretary of State No. 240, dated 20th Sept. 1869.
I have mentioned the immediate measures by which Lord Mayo endeavoured to stay the impending deficit. But he felt that such measures strained the whole mechanism of the Government; that to stop public works on a sudden involved waste of material, while the increase of taxation during the current year disclosed in a most undesirable manner the shortcomings of our system, and might prove a cause of perilous discontent among the Indian people. 'We have played our last card,' he once said in conversation, 'and we have nothing left in our hands to fall back upon, except to devise measures which will prevent the recurrence of a similar crisis hereafter.' He accordingly resolved to find a permanent remedy, by removing the causes of the financial misfortunes in past years.
His reforms divide themselves into three branches. First, improvements in the mechanism of the Financial Department of the Supreme Government itself. Lord Mayo thought that it would be vain to ask the Local Governments to set their houses in order, if they could point to confusion or want of prevision in his own. Second, the more rigid enforcement on the Local Governments of economy in framing their estimates, and of accuracy in keeping within them. While thus increasing their fiscal responsibility, Lord Mayo also extended their financial powers. Third, a systematic and permanent readjustment of the revenues and the expenditure.
First, as regards defects in the mechanism of the Financial Department, Lord Mayo found that the disastrous series of fiscal surprises were due in part to unpunctuality in the submission of the yearly estimates by the Local Governments and Departments, so that the Supreme Government had not sufficient time to examine and collate the accounts before the season for delivering the financial statement arrived. He discovered, also, grave deficiencies in the Financial Department itself as regards intelligent observation of the progress of the finances during the year. While, therefore, the Local Governments throughout India were complaining of the number and complexity of the statistical returns required from them, the last act in the process which would have rendered these returns fruitful of results, namely, their careful collation by the Finance Department, was inefficiently performed.
Without such final collation, the gathering of statistics is indeed a thankless task. I merely repeat the statement of the Member of the Government best qualified to speak on the subject, when I say that, up to Lord Mayo's time, no sufficient provision existed for the intelligent use of the statistical materials which daily poured in. It did not seem to be understood that the toil expended by scattered Departments upon the compilation of returns can bear no fruit unless they are intelligently studied by the central bureau for which they are compiled. Statistics as they existed in India before Lord Mayo's rule were sorrowful memorials of faithful subordinate labour, rendered unavailing by the indifference or neglect of higher officials.
The financial collapse in 1869, forming as it did one of a series of similar catastrophes, gave a new impulse to better work. The preparation of classified statistics was undertaken on a systematic basis and with an extended scope. Having thus put his own house in order, Lord Mayo took measures to ensure punctuality in the submission of the Estimates by Local Governments and Departments. He also organised, or to speak more correctly, remodelled a system by which the Supreme Government now obtains full information bearing upon the progress of the finances month by month. Mr. Chapman, the Secretary to the Department and the officer most competent to speak, thus wrote of the results:—'It is not too much to say that it has become impossible for the Government to remain long ignorant of any important fact affecting the finances. Expectation may be disappointed, misfortune or mistakes may occur; but the Government will at least be promptly informed of the event, and it is difficult to exaggerate the importance of promptitude in this respect.'
The second great branch of Lord Mayo's financial reforms consisted in his more rigid enforcement of economy upon the Local Governments. A fertile source of financial difficulty has always existed in the division of the British administration of India into a number of governments, separated from, although subordinate to, the Governor-General in Council. Before Lord Mayo's Viceroyalty the separate governments, while so far independent entities as to be responsible for the civil administration and improvement of their several Provinces at the cost of the imperial revenues, had, in regard to their revenues, no independent financial powers. Towards the end of every year, each Local Government presented to the Governor-General in Council its estimates of expenditure during the coming twelve months. The Governor-General in Council, after comparing these aggregate estimates with the expected revenue from all India, granted to each Local Government such sums as could be spared for its local services.
The system acted in a manner most unfavourable to economy. The Local Governments were under no compulsion to adjust their expenditure to any limited scale of income, and several of them fell into the habit of framing their demands upon the Imperial Treasury, with an eye rather to what they would like to spend than what was absolutely required. 'Practically,' writes one who had the official control of the system, 'the more a Government asked, the more it got; the relative requirements of the Local Governments being measured by their relative demands. Accordingly they asked freely and increasingly. Again, knowing that any money saved at the end of the year was lost to the provincial administration, a Local Government was little anxious to save.' These words, while representing the facts, do not necessarily involve a reproach. In India more money can be spent with advantage on almost every branch of the administration than the revenues will permit.
Lord Mayo clearly discerned that, in order to secure the co-operation of the Local Governments in the work of financial reform, he must invest those Governments with a share of the financial responsibility. After an exhaustive preliminary correspondence with each separate Administration, he issued a Resolution on the 14th December, 1870, which may be called the Charter of the Provincial Governments. By this document, which in due time received the approval of the Secretary of State, a fixed yearly consolidated grant was made to each Government, to enable it to defray the cost of its principal services, exclusive of the Army, but including Public Works. The grants thus made were final, for a period usually of five years, and were liable to reduction only in case of severe financial distress happening to the Supreme Government. They belong absolutely to the respective Local Governments. No savings from any one of them revert to the Imperial Treasury. Their distribution is left to the discretion of the Local Governments, without interference on the part of the Governor-General in Council.
The services thus made over to them included the protection of person and property, the education of the people, the record of changes or transfers connected with landed property, sanitation, Local Public Works, and a number of minor branches of government. For official purposes they were grouped as follows: Jails, Registration, Police, Education, Medical Services (except 'Medical Establishments'), Printing (an enormous item in India), Roads, Civil Buildings, and various Public Works, Miscellaneous Public Improvements, and various minor services.
This well-jointed system of Provincial and Imperial Finance continues to be the basis of Indian Finance to this day. It has received further developments since Lord Mayo's time, but its principles remain unchanged. Sir John Strachey thus summarised the state of things which preceded it:—
'For many years before Lord Mayo became Viceroy, the ordinary financial condition of India had been one of chronic deficit, and one of the main causes of this state of affairs was the impossibility of resisting the constantly increasing demands of the Local Governments for the means of providing many kinds of improvement in the administration of their respective Provinces. Their demands were practically unlimited, because there was almost no limit to their legitimate wants. The Local Governments had no means of knowing the measure by which their annual demands upon the Government of India ought to be regulated. They had a purse to draw upon of unlimited, because of unknown, depth. They saw on every side the necessity for improvements, and their constant and justifiable desire was to obtain for their own Provinces and people as large a share as they could persuade the Government of India to give them out of the general revenues of the Empire. They found by experience, that the less economy they practised, and the more importunate their demands, the more likely they were to persuade the Government of India of the urgency of their requirements. In representing those requirements they felt that they did what was right; and they left to the Government of India, which had taken the task upon itself, the responsibility of refusing to provide the necessary means.
'The Government of India had totally failed to check the constant demands for increased expenditure. There was but one remedy: namely, to prevent the demands being made; and this could only be done by imposing on the Local Governments a real and an effectual responsibility for maintaining equilibrium in their local finances. There could be no standard of economy until apparent requirements were made absolutely dependent upon known available means. It was impossible for either the Supreme or Local Governments to say what portion of the provincial revenues was properly applicable to local wants. The revenues of the whole of India went into a common fund, and to determine how much of this fund ought fairly to be given to one Province and how much to another, was impracticable.'
'The distribution of the public income,' Major-General R. Strachey wrote, 'degenerates into something like a scramble, in which the most violent has the advantage. As local economy leads to no local advantage, the stimulus to avoid waste is reduced to a minimum. So as no local growth of the income leads to an increase of the local means of improvement, the interest in developing the public revenues is also brought down to the lowest level.' It is right to add that the reforms by which Lord Mayo put an end to this unprofitable state of things were in a large measure due to the initiative of General Richard Strachey, supported by the administrative authority and experience of his brother, Sir John Strachey. But the question of Local Finance first presented itself to Lord Mayo during his inquiries in the India Office, and he discussed it at Madras on his way out to Calcutta.
Lord Mayo's third and heaviest task was the permanent readjustment of the revenues to the expenditure. He accomplished this task partly by new taxation, but chiefly by economy and retrenchment. On his arrival in January, 1869, Lord Mayo found two Despatches awaiting his consideration. One was a Despatch from his predecessor, Lord Lawrence, urging on the Secretary of State the imposition of an income tax; or, more strictly, the expansion of the certificate tax into an income tax for the year 1869-70 then about to begin. The other was a Despatch from the Secretary of State sanctioning the proposal. Lord Mayo's first measure with a view to raising the revenues of India was, therefore, to carry out this decision which had been arrived at before he reached India, and to levy an income tax. By efforts to equalise the salt duty in certain provinces, and at the same time to develop new sources of salt supply, and to cheapen the cost of carriage, he laid the foundation of a further increase of revenue, with the least possible addition to the burdens of the people.
It was, however, to economy rather than to increased taxation that Lord Mayo looked for a surplus. Indeed, he strongly felt the necessity of abandoning some of the old objectionable forms of Indian taxation, such as the export duties; and he made a beginning by abolishing the export duty on wheat. On the other hand, every Department of Expenditure was keenly scrutinised, and severely cut down to the lowest point compatible with efficiency. As a matter of fact, and notwithstanding the new income-tax, the total revenue which he levied from India during his three years of office averaged nearly a million less than the revenue levied during the year 1868-69 preceding his Viceroyalty; while the expenditure averaged about five millions per annum less than that of the year preceding his Viceroyalty. The following table exhibits the results of the system of vigilant economy by which Lord Mayo converted a series of years of deficit into a series of years of surplus. For purposes of reference to the Parliamentary accounts it reproduces the conversion at the then official rate. It does not, accordingly, show the exact balance in sterling, as worked out for the table [above].
Indian Revenue and Expenditure under Lord Mayo
(at the then official rate of ten rupees to the pound).
| Year. | Revenue. | Ordinary Expenditure. | |
1868-69 1869-70 1870-71 1871-72 | £51,657,658 50,901,081 51,413,685 50,109,093 | Year of Deficit preceding Lord Mayo's Rule. Year of equilibrium; his first year of office. Years of Surplus; his last two years of office. | £54,431,688 50,782,413 49,930,695 46,984,915 |
Lord Mayo did not live to see the permanent fruit of his labours. But I cannot conclude this brief sketch of them more fitly than by a letter which the Financial Secretary to the Government of India wrote to me three years after Lord Mayo's death, when his work had been tested by the touchstone of time.
'Lord Mayo's close personal attention to financial questions never flagged. He had by decisive measures established steady surplus for chronic deficit; he had increased the working power of the Local Governments, while checking the growth of their demands upon the Imperial Treasury. He had established a policy of systematic watchfulness and severe economy. The time was now coming when the results of all his exertions and sacrifices were to be gathered; when the Viceroy would be able to gratify his nature by granting relief from the burdens which he had reluctantly imposed. Lord Mayo was occupied with such questions on the very journey which ended so fatally. He had reason to hope that effective remission of taxation would soon be practicable, but he was still uncertain what shape it ought to take. It should never be forgotten that the welcome measures of relief which the Government subsequently found itself in a position to effect, were possible only in consequence of Lord Mayo's vigorous policy of retrenchment and economy.
'He found serious deficit, and left substantial surplus. He found estimates habitually untrustworthy; he left them thoroughly worthy of confidence. He found accounts in arrear, and statistics incomplete; he left them punctual and full. He found the relation between the Local Governments and the Supreme Government in an unsatisfactory condition, and the powers of the Local Governments for good hampered by obsolete financial bonds. He left the Local Governments working with cordiality, harmony, and freedom, under the direction of the Governor-General in Council. He found the Financial Department conducted with a general laxity; he left it in vigorous efficiency. And if the sound principles be adhered to, which Lord Mayo held of such importance, and which in his hands proved so thoroughly effective, India ought not again to sink into the state from which he delivered her.'