Abstract
The 1920s were a harsh and difficult decade for the Tata Iron and Steel Company (TISCO) in terms of not only continuous labour unrest , the topic of the previous and next chapters, but also severe price deflation that began in 1921, the latter, the subject of the present chapter, marked by a worldwide decline in prices after the post-war economic boom, which became more pronounced in the Indian context.
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- 1.
Tomlinson has explained that an “irreducible minimum” for the Government of India was “to provide a market for British goods, to pay interest on the sterling debt and other charges that fell due in London, and to maintain a large number of British troops from local revenues and make a part of the Indian army available for imperial garrisons and expeditionary forces from Suez to Hong Kong” (Tomlinson 2013, p. 125). To secure the payment of “interest on the sterling debt and other charges [as the] irreducible minimum” for the Government of India, stabilizing the value of the rupee against the sterling pound was crucial. This is because an unstable rupee could damage certainty of the payment; and stabilization needed balanced revenue accounts, since the Government’s rising fiscal deficit could reduce the value of the rupee against foreign currencies, including the sterling pound. Therefore, balancing revenue accounts was deemed crucial for all policy makers throughout the colonial period. Such an irreducible minimum has been called by Tomlinson “imperial commitment,” which formed the basis of Raj policy. Tomlinson considers that imperial commitment caused the employment of “an automatic, self-regulating system of currency management,” Government officials taking “no active role in matters so important to the domestic economy” (Tomlinson 1979, p. 64). A similar line of reasoning is also presented in Tomlinson (1982, p. 134, 2013, p. 125).
- 2.
Chairman’s speech at the annual general meeting of TISCO, 9 June 1921, Chairman’s Addresses 1914–1938 Papers, p. 1, Tata Steel Archives, Jamshedpur, India (TSA).
- 3.
Tomlinson’s notion of “imperial commitment” is explained in the first footnote of this chapter.
- 4.
- 5.
After referring to the influence of fixing the rupee exchange rate at 1s 6d, Bagchi writes, “it is clear that this severe dose of internal deflation combined with intense competition from abroad made the prospects of profitable investment in any but the most ‘naturally protected’ industries look extremely gloomy” (Bagchi 1972, p. 65).
- 6.
The controversies over the different trends in price indexes during the 1920s are reviewed in Tomlinson (1979, pp. 74–6).
- 7.
The population size of India increased almost 10% during the decade of the 1920s to 338.2 million in 1931 from 305.7 million in 1921 after long decades of slow growth that reached 303.0 million in 1911 (Visaria and Visaria 1983, p. 488). Regarding stagnating agricultural production from 1920 on, see Sivasubramonian (2000).
- 8.
The negative influence of rupee appreciation over India’s business corporations is noted also by Roy (2006, p. 340).
- 9.
F. E. Dinshaw played a significant role during these critical years. After lending Rs. 90 lakh to the company in 1922, he obtained a loan of Rs. 100 lakh (in the form of a running account) at 1.5% above the bank rate with a minimum of 6.5% and secured by unfledged liquid assets from Maharaja of Gwalio in 1924. Additionally, at the end of 1924, he guaranteed a loan of Rs. 10 lakh from Sir Sasoon David to the company to enable payment of debenture interest. In return, Tata Sons agreed to pay him a portion of the agency commission annually (TISCO 1967, p. 170).
- 10.
Padshah to the board of directors, 8 July 1922, General Managers’ Correspondence (GMC) Papers, File 119, pp. 45–6, TSA.
- 11.
We have already seen in Chap. 5 that TISCO workers interpreted the dividend payment as a sign of TISCO’s healthy financial condition and requested an increase in remuneration.
- 12.
Bagchi has noted, “[In the early 1920] the government was competing with the bigger private businessmen in the organized money market for loans and raising the rate of interest” (Bagchi 1972, p. 44).
- 13.
TISCO, Annual report of TISCO (ART), 1921/22 and 1922/23, TSA.
- 14.
Peterson to Tutwiler, 27 March 1923, GMC Papers, File 125, p. 221, TSA.
- 15.
The contribution of customs duties to total central revenues increased from a mere 7.8% in 1914/15 to 14.8% in 1920/21, 21.6% in 1925/26, 22.5% in 1930/31, and 25.7% in 1935/36 (Charlesworth 1985, p. 525).
- 16.
- 17.
All tariff ratios mentioned here are calculated by the following equation: [Customs revenue (of total or separate items of import)] divided by [Imports (of total or separate items)]. This approximates the tariff rate; and the trend is consistent with the general understanding to date (Kumar 1983, pp. 920–4).
- 18.
Figure 6.3 shows several historically significant facts, beginning with the fact that substantial government intervention began during the interwar period. Secondly, the Figure clearly shows that the Indian tariff rate in the early 1930s was greater than the rate in the early 1960s, when the Second Five-Year Plan was implemented. Such unprecedented intervention could be seen as a new phase, beginning as early as the 1930s, of the kind of role the government would play in the Indian economy, as least in terms of foreign trade and tariff protection.
- 19.
The Fiscal Commission was composed of many “protectionists,” such as Ibrahim Rahimtoola, president of the Commission and “a spokesman for Bombay mill interests,” and Ghanshyamdass Birla of the industrialist House of Birla under the recommendation of Edwin Montagu, secretary of state for India. For more details regarding the membership of the Commission, see Rider (1971, Chap. 9).
- 20.
On the way in which the Indian Tariff Board calculated the tariff rates on steel in its first report, see Spiegelman (1960, pp. 65–70).
- 21.
- 22.
Tomlinson has assessed the effectiveness of tariff protection as follows. “While the way in which the Boards were set up and the briefs that they were given inhibited the formulation of a long-term, integrated protective policy, the measures that Government enacted on their recommendations did give real aid to all the industries [that were given protection, with a few exceptions]” (Tomlinson 1979, p. 62).
- 23.
There are other controversies surrounding the subject of tariff protection, including the claim that historic initial tariffs on steel had not little to do with the close and special relationship that existed between the Government and the House of Tata, the only steel producers in India, in light of the indifferent to outright hostile attitude of the Government toward other indigenous business houses and industries (Markovits 1985).
- 24.
Specialists on the iron and steel industry in colonial India, such as Rider and Wagle, have not paid due attention to the effectiveness of tariff protection (Riders 1971; Wagle 1981). According to the understanding of this writer, only Spiegelman’s Ph.D. dissertation has given that effectiveness the attention it deserves (Spiegelman 1960).
- 25.
Tariff rates were estimated by custom revenues divided by total imports.
- 26.
When calculating the gross profit, we assume that tariff protection did not affect the demand for steel, based on Spiegelman’s analysis showing that the demand curve for steel in India in the 1920s and the 1930s was “relatively inelastic” and “the burden of the tariff was shifted almost fully onto the consumers of steel, and the tariff was effective in raising the price of steel” (Spiegelman 1960, p. 236).
- 27.
Spiegelman has also analyzed in detail the influence of tariff protection on TISCO’s financial condition of TISCO, concluding, “In the thirteen-year period 1924–25 to 1936–37, with protection (including bounties), there had been total net profits (before taxes, but after depreciation) of Rs. 83.3 million. If there had been no protection, there would have been net losses of Rs. 20.4 million. Thus, in this thirteen-year period, protection contributed Rs. 103.7 million to TISCO’s coffers” (Spiegelman 1960, p. 209. Parentheses and emphasis in the original). Thus, Spiegelman has also noted the significance of tariff protection for the financial stability of TISCO, but has not paid sufficient attention to the importance of protection for accumulating depreciation and a reserve fund as a source of long-term capital.
- 28.
Monthly maximum and minimum market value of the Tata Steel shares, Tariff Board Papers, File 17, TSA.
- 29.
According to Rider, the need for such incentive-friendly protection was recognized by British government officials, businessmen and politicians, as well as Indian nationals, at the time they were introduced. Rider also notes that these contemporaries understood the difference between “the static and dynamic versions of comparative advantage.” They insisted that India should seek to achieve the dynamic version based on well-calculated scientific tariff protection” (Rider 1971, Chap. 9, in particular pp. 373–4).
- 30.
Bagchi also considers the protective tariff on steel in the 1920s to have been incentive-friendly (Bagchi 1972, pp. 314–21).
- 31.
Padshah to Visvaswaraya, 12 February 1919, Padshah Papers, Box 7, File 1, TSA.
- 32.
Padshah to Harris, 25 May 1922, Padshah Papers, Box 5, File 5, TSA.
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Nomura, C. (2018). The Financial Crisis of the 1920s, the Introduction of Tariff Protection and “Imperial Commitment”. In: The House of Tata Meets the Second Industrial Revolution. Studies in Economic History. Springer, Singapore. https://doi.org/10.1007/978-981-10-8678-6_6
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