Financial story of our independence

Another Independence Day has come and gone. Right through history, imperial powers have clung to their possessions to death. Why, then, did Britain in 1947 give up the jewel in its crown, India?

For many reasons. The independence struggle exposed the hollowness of the white man’s burden. Provincial self-rule since 1935 paved the way for full self-rule. Churchill resisted independence, but the Labour government of Atlee was anti-imperialist by ideology.

Finally, the Royal Indian Navy mutiny in 1946 raised fears of a second Sepoy Mutiny, and convinced British waverers that it was safer to withdraw gracefully.

But politico-military explanations are not enough. The basis of empire was always money. The end of empire had much to do with the fact that British imperialism had ceased to be profitable. World War II left Britain victorious but deeply indebted, needing Marshall Aid and loans from the World Bank. This constituted a strong financial case for ending the no-longer-profitable empire.

Empire-building is expensive. The US is spending one billion dollars a day in operations in Iraq that fall well short of full-scale imperialism. Through the centuries, empire-building was costly, yet constantly undertaken because it promised high returns.

The investment was in armies and conquest. The returns came through plunder and taxes from the conquered. No immorality was attached to imperial loot and plunder. The biggest conquerors were typically revered (hence titles like Alexander the Great, Akbar the Great, and Peter the Great). The bigger and richer the empire, the more the plunderer was admired.

This mindset gradually changed with the rise of new ideas about equality and governing for the public good, ideas that culminated in the French and American revolutions. Robert Clive was impeached for making a little money on the side, and so was Warren Hastings. The white man’s burden came up as a new moral rationale for conquest: It was supposedly for the good of the conquered. This led to much muddled hypocrisy. On the one hand, the empire needed to be profitable. On the other hand, the white man’s burden made brazen loot impossible. An additional factor deterring loot was the 1857 Sepoy Mutiny. Though crushed, it reminded the British vividly that they were a tiny ethnic group who could not rule a gigantic subcontinent without the support of important locals.

After 1857, the British stopped annexing one princely state after another, and instead treated the princes as allies. Land revenue was fixed in absolute terms, partly to prevent local unrest and partly to promote the notion of the white man’s burden. The empire proclaimed itself to be a protector of the Indian peasant against exploitation by Indian elites.

This was denounced as hypocrisy by nationalists like Dadabhoy Naoroji in the 19th century, who complained that land taxes led to an enormous drain from India to Britain. Objective calculations by historians like Angus Maddison suggest a drain of perhaps 1.6 per cent of Indian GNP in the 19th century. But land revenue was more or less fixed by the Raj in absolute terms, and so its real value diminished rapidly with inflation in the 20th century. By World War II, India had ceased to be a profit centre for the British Empire.

Historically, conquered nations paid taxes to finance fresh wars of the conqueror. India itself was asked to pay a large sum at the end of World War I to help repair Britain’s finances.

But, as shown by historian Indivar Kamtekar, the independence movement led by Gandhiji changed the political landscape, and made mass taxation of India increasingly difficult. By World War II, this had become politically impossible.

Far from taxing India to pay for World War II, Britain actually began paying India for its contribution of men and goods. Troops from white dominions like Australia, Canada and New Zealand were paid for entirely by those countries, but Indian costs were shared by the British government. Britain paid in the form of non-convertible sterling balances, which mounted swiftly. The conqueror was paying the conquered, undercutting the profitability on which all empire is founded.

Churchill opposed this, and wanted to tax India rather than owe it money. But he was overruled by India hands who said India would resist payment, and paralyse the war effort. Leo Amery, secretary of state for India, said that when you are driving in a taxi to the station to catch a life-or-death train, you do not loudly announce that you have doubts about whether to pay the fare.

Thus World War II converted India from a debtor to a creditor with over one billion pounds in sterling balances. Britain, meanwhile, became the biggest debtor in the world. It’s not worth ruling over people you are afraid to tax. That’s why the British left. Our school textbooks do not mention this as a key reason why India got its independence. Yet, that is the case.

2 thoughts on “Financial story of our independence

  • 2010.Dec.06 at 15:52

    So it was a case of the milch cow turning barren, which made them quit…..hmmmm. Can you please let us know if the amount of Loans India gave Britain for II World War was ever repaid by them ?


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