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SIMS CLICVlof West oem Se, , TRANSPORT SYSTEM— I. THE RAILWAYS wish val, , The relationship between the growth of Britis me a ism and, evolution of a dependent, colonial economy in India in prea r manifested jp, ‘, development of Indian railways, roads and cee nee _ works, ete,, these, railway construction profoundly altered India’s des iny. ne Predj, 1853 that “the railway system will therefore become in n ‘a truly the, forerunner of modern industry”. But railways were not eveloped in India ¢, stimulate industrial development. The first important consideration that led t,, the construction of railways in India was the commercial needs of the Lancashig, mills for good and clean cotton as its carrying by typical local mode of transpon, (i.e., cart) led to dirt. The second consideration that required railws,, construction was the military strategy. Railways would provide quick, reliable transportation of goods, troops, and stores. Thus, surely commercial, , political objectives encouraged the building up of an extensive railway syste, India., , Cteg i, , ang, ang, M in, , While estimating its overall impact, Marx in 1881 commented that the, railways were ‘useless to the Hindus’ as much of the burden arising out of, guaranteed interest system was borne by the poor Indian taxpayers. In addition,, , the normal ‘multiplier’ effects of railway investment were conspicuously absen:, in colonial India., , Before the introduction of railways in India, transportation was costly,, undependable and difficult. With the acquiring of political power, the, Government of India together with the British Government realised the, importance of the improved means of transport and railways were thought tobe, most ideal so far as low transport costs, reliability, and speed were concerned,, Not long after railway construction began in England (1825), the idea for the, construction of railway lines in this country was first mooted in 1832. However,, the country had to wait for about 20 years when the first railway passenger train, was steamed off from Bombay to Thane — 16th April 1853 was a historic one. The, history of railway development in India can be conveniently grouped under, different heads. These are discussed in the following order., , (A) The Old Guarantee System (1844-69), , entrusted to private companies “under the supervision and control of the, Government”, He flatly rejected, , the idea of Government constructing the, railways. Accordingly, two contracts were made—one with the East Indi?, ey Company in 1849 to Open an experimental line from Calcutta ©, a branch going to Ranigunj, and another with the Great Indi?
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cH: ASPECTS OF BRITISH IMPERIAL, POLICY LS 65, =, , peninsular Company in the same year, As a result of these contracts, the first, jassenger train ran between Bombay and Thane in April, 1853 and the second one, {rom Howrah to Panduah in July 1854,, , Several arguments were advanced in favour of the construction of railway, lines by the joint stock companies incorporated in England, Firstly, pressure from, Lancashire manufacturing interests who argued that a larger supply of clean raw, cotton could be drawn from India so that the English cotton industry could, flourish. This could be strengthened by the development of a railway network, , and railways were to be floated on a commercial basis. As the operation of a, , commercial undertaking did not fall within the proper functions of the, government, railways were to be built by private companies, Secondly, the habit, of dependence of people on government for Anything, smacked of a bad practice of, Indian people. To discourage this tendency, railway construction should be, thrown open to English merchants. Of course, at that time private companies, , showed indubitable credibility in the supply of huge capital., , In accordance with Dalhousie’s plan, contracts were made with eight, companies for the construction and management of 5,000 miles of railway line, between 1854 and 1860 under terms that came to be known as the Old Guarantee, system (OGS). The system intended to assure a minimum rate of return on the, capital to be invested, It was in the form of a system of subsidies. British, investors promptly responded and put their capital to the private railway, companies — this was indeed a veritable bonanza for British business,, , Features of the OGS, , (i) free gift of land by the State to the private companies on a lease for 99, , years;, , (ii) guaranteed interest at rates varying between 5 p.c. and 4.5 p.c. on the, capital outlay payable at the fixed rate of exchange of 22 pence per, rupee for a period of 99 years on the capital raised by the companies;, , (iii) surplus profits over this 5 p.c., if any, were to be shared equally with, the Government;, , (iv) reservation of powers of supervision and control of the construction and, the working of the railways including rates and fares by the, Government;, , (v) reservation of the right of purchase of lines after 25 years by the State;, , (vi) surrender of the railroads at 6 months’ notice by the companies and get, back the actual capital spent by them, if they wished., , These extremely favourable terms of contract, made for a period of 25 years, (1844-69), came to be known as the OGS of railway construction. Because of the, indulgence made in the contracts, there had been voluminous export of British, capital to India for investment in railways. Not only this, railway equipment, supplied by the British firms also flowed to India considerably,, , Criticisms, , Although assistance in the form of a system of subsidies known as the, ‘guarantee’ might be partially justified for Indian railway construction, the OGS,, , Ind. Reo. Historv——8
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66 ST INDIAN ECONOMIC HISTORY, , as found to be unnecessary and wasteful. It was agreeg, by the architect of the system that capital would not be forthcoming to India for, , y y without a guaranteed interest. Against this premise, critics, like William Thornton and Macpherson argued that a unguaranteed capita, would have gone into India since England at that ie wes baa ely seeking, the outlet of surplus capital. Thus, the OGS yearned at /p Ng personal, , interest at public expenses:, , in the ultimate analysis, W, , railway constructiot, , as the system led to reckless expenditure. The railway, t urtail expenditure in view of the ‘guarantee, clause’ invested huge capital man was economically, and scientifically justified. Further, assuming indispensability of the guaranteed, income, it need not have been quoted so high since the prospect of getting money, at 3 p.c. guarantee was readily available at that time. Ne minimum yield, guaranteed (4.5 p.c to 5 p.c.) was in excess of prevailing rates in London money, market, Prof. N. Sanyal rightly says that “the Indian guarantee killed effort for, economy, promoted recklessness, and involved the country in liabilities much, , beyond what the people could bear”., , In all, 4,255 miles af line had been opened by 1869, with a capital outlay of, Rs. 89 crore. One ‘résult of the wasteful expenditure was that, instead of, estimated cost of construction of £ 8,000 per mile, it actually shot up to £18,000 per, mile—without counting dividends advanced upon the guarantee and the cost of, land which was given free. A variety of factors were responsible for such high, cost. These were : pioneering nature of the work, lack of skilled labour, lack of, experience, high but unnecessary standard of construction, etc. However, the, principal factor that led to the high cost of construction was the system of, excessive guarantees which left no positive encouragement to the companies to, economise in construction or in operation. Wasteful construction of railway lines, actually brought down companies’ actual rates of return and unnecessarily, increased the subsidy and mulct the State of millions of rupees. Many of the, unprofitable lines constructed by the companies survived mainly out of the, ‘guarantee clause’. The guaranteed interest on the capital invested in railways,, which India had to pay in sterling, stood at 13.5 million pounds by 1868., , It was wasteful, companies has no inducement to ¢, _ Private railway companies, , Thus, the OGS imposed an enormous financial burden on the State as well as, the taxpayer. Deficit on the railway budget rose to a staggering figure of, Rs. 166.5 lakh by 1869. It was said that the entire profit went to the guaranteed, companies and the whole loss to the Government. Following M. Dobb, we can, conclude that railway construction indeed served for Britain and not India “the, double function of providing a profitable outlet for capital and stimulating the, , oe of British capital goods”. Thus, the guarantee contributed substantially t, e ‘drain’ of funds from the sub-continent., , as pape the foreign tuler did not show any amount of interest to build, devndad : ee industries in India required to supply the materials, y the railways, Obviously, this then demanded imports of the
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cA. Qi ASPECTS OP BRITISH MPERIAL POLICY comnmmcupeimeemmes 67, , materials from foreign countries, mainly Britain, In other w:, , ords, the OGS failed, to give any forward thrust to industries, , allied to railways., (e) State Construction and Management (1869-82), , In view of the extravagance and mismanagement of the private companies,, absence of effective control in the working of the companies, the remote, ossibilities of sharing the profits and highly unsatisfactory financial results, it, was decided to follow a policy of direct government construction of railways. So, far as the OGS was concerned, the entire profits, went to the foreign companies, while the entire loss to the Government. The then Viceory, Governor General, Lord Lawrence, in 1867 and, again, in 1869, argued that the Government of India, could raise capital in the British market at a cheaper rate (e.g., not more than, 4 pc.) and undertake the cheaper methods of construction of railways under its, own supervision. This proposal was sanctioned and the construction of State, Railways was undertaken accordingly in 1870 with borrowed capital. Thus, in, , the history of Indian Railway, a new epoch started in 1870 as it was an era of, laissez-faire., , Wrongs committed in the earlier Period have been now set right. The first ten, years after 1869 witnessed construction of railway lines at a remarkable speed., The average cost of construction came down due to greater efficiency and economy, in construction, particularly on the State lines. The saving in costs during this, period was due to the adoption of a new cheaper gauge, called the meter gauge,, for nearly all lines. But the other evil of meter gauge line was nevertheless, unimportant. The evil was the financial embarrassments. A comparison of, financial results in 1880 showed that the average return on capital on companymanaged lines stood at 6.2 p.c. as against 2.15 p-c. on the State lines. This was, partly due to the fact that company lines were Mainly located in the high profit, areas and prosperous part in the country and State lines were spread across the, country as the policy of the Government relating to railway construction was, based on humanitarian and strategic considerations. Some ‘famine lines’ were, constructed and some lines were constructed for defending the frontiers and for the, movement of military in controlling the mob. As a result, financial difficulties of, the Government went to nadir more because of the fall in the exchange value of, rupee, a rise in the costs of famine relief, and, a rise in defence costs on the, North-West Frontier., , Moreover, the Famine Commission of 1880 opined that to tackle the menace, of famine, construction of additional 5,000 miles of railways was to be undertaken, on a war footing. Equally vociferous was the British merchants and industrialists, as regards state construction and they. outcried for the rapid expansion of, Trailways to encourage wheat exports from the remotest field of this country to, England and the import of iron rails and other supplies 'to India., , (C) The New Guarantee System (1882-1900), , Upset by resource crunch and the strong desire of the Famine Commission to, construct railway lines as speedy as possible to mitigate the problem of famines,, the Government once again returned to the policy of inviting private British
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7, , 68 haan adaeniahiiienaeeiemmeeenaeeeeee rr, INDIAN ECONOMIC HISTORY, , companies to undertake railway construction, Company Management of ‘States, owned lines was favoured and, when the Government purchased the ‘East ba, Railway’ in 1879 its management was left with the old company ey, Parliamentary Select Committee of 1884 recommended that, along with _, private companies, the ‘State’ should come forward to construct railways, Th, this arrangement —known as the New Guarantee System (NGS)— was based se, sort of partnership between the Government and the private railway companies, Under this system, fresh contracts were made by the Government with the, private companies, but with terms more favourable to itself this time . ‘, , Features of the NGS, , The terms that were granted to the companies are known in the histor of, India’s railway construction as the ‘New Guarantee System’. The chief differen, tiating features of the NGS were :, , (i) railway lines managed by privare companies from the beginning were, , * declared to be the property of the Secretary of State for India who, reserved the right to terminate the contract after 25 years and/or at, subsequent 10-year intervals on payment of the capital provided by the, companies;, , (ii) the interest guaranteed to the companies on their capital was Pegged at, , a lower rate, usually 3.5 p.c.; and, , (iii) the Government retained a much larger share of the surplus Profits,, usually three-fifths., , When the contracts of the old guarantee companies ran out, the Government, acquired the railway lines; some of which were retained under direct State, management and others were handed over again for management to the same, companies under the NGS. However, the construction of railway lines had not, altogether been given up by the State. The State continued to construct both, protective and productive and self-supporting railways leaving only profitable, lines to private companies., , OGS vs NGS, , So far as the terms of contract were concerned under the old and the, new system, the latter displayed better and more favourable terms to the State., Firstly, under the NGS, the lines constructed by private railway companies, such, as the Bengal Central Railway, the Bengal Nagpur Railway, the Souther, Maratha Railway, etc., were from the beginning the property of the Secretary of, State. But, under the OGS, the State exercised the power to purchase lines from, the companies after 25 or 50 years. Railways would become the property of the, State after the expiry of 99-year lease. Thus, the OGS failed to prevent ga, capitalisation in the railways. Secondly, the guaranteed interest on the capita, contributed by the companies was lower (3.5 p.c.) under the NGS, while it ia, about 5 p.c. under the OGS. Thirdly, the division of surplus profit under the N, , fits, was more favourable (usually 2ths) than under the OGS where surplus prot, 5 n, , were to be shared on a 50-50 basis. Fourthly, under the OGS, if the Governme, , ay, wished to buy off railway lines, the Government would hays sae, compensation at the average market value of the companies’ shares in Lon
