2. The Development of the Modern Business Corporation in 19th Century India: Building the Foundations for the Emergence of TISCO in the 20th Century

This by no means suggests that colonial India’s laissez faire economic policy framework set an ideal foundation for modern economic development in colonial India. As the following arguments show, this study negatively assesses some of those laissez faire-based policies, like the persistent employment of retrenchment fiscal policy or lack of government regulations over malfunctioning stock exchanges. Furthermore, we understand that India during the second half of the 19th century suffered, for example, from serious recurring famines in the heyday of laissez faire due to the government’s deplorable lack of attention to the wide-ranging destructive side-effects of such a policy framework (Davis 2001). We thus characterize the period in question as one making progress in transaction efficiency, while at the same time one of unmitigated ignorance towards the deleterious side-effects of laissez-faire policy.

The agricultural industry (including livestock, forestry, and fishing) employed nearly three-quarters of India’s workforce in 1901 (Goldsmith 1983).

Differences between the two industries existed in gender as well as labour intensity at the end of the 19th century. Most textile workers in Japanese mills were female, while those in Indian mills male. Some Japanese mills were using double shifts in their labour management systems as early as 1883 (Ishii 2015, pp. 48–9; Takamura and Naosuke 1971, pp. 100–1).

Such large-scale employment of modern business concerns extended to the heavy industrial sector. Leading railway workshops in 1915 employed 10,899 at East Indian Railway Locomotive Workshop, Jamalpur, 7,192 at Bengal Nagpur Railway Locomotive and Carriage workshop, Kharagpur) and 5,627 at Madras and South Mahratta Railway Perambur Works (GOI 1918a).

One sterling pound was equal to Rs. 14 in 1889 (Shirras 1920).

Original figures in Chandler were in US dollars, which were converted into Indian rupees in 1893 at $1 = Rs. 3.4 (Mitchell 1988; Shirras 1920).

The first track mileage operated by all 35 companies with capitalization in excess of $100 million in 1893 was 69% of the total first track mileage operated in the United States (169,780) in 1893 (Chandler 1977, p. 168).

One Japanese yen was equivalent to Rs. 1.5 in 1917 (Government of Japan).

For how such measures developed in the United States, Britain and Japan, see Chandler (1990).

For details regarding tariff policy and the administrative agencies in charge of implementation in colonial India, see Rider (1971).

The research to date is divided over the implications of low tariffs for India’s modern business corporations. Some studies consider low rates damaging prospects for potential growth of domestic industry due to severe competition from Britain (Bagchi 1972), while others note that low tariff rates offered easily accessible markets to Indian manufacturers, and thus promoted the development of Indian modern business corporations. The proponents of the latter view, such as Tomlinson (2013), assert that the India’s cotton mill industry produced low count cotton yarn with comparative advantage under the low tariff rate policy. He argues that India’s low count cotton yarn did not compete with British-manufactured higher count cotton yarn.

This decision has also received differing assessments in the research to date. Some consider that the gold exchange standard damaged the competitiveness of India’s leading industrial products, such as cotton yarn, because the yarn was mainly exported to East Asia where the silver standard was still used. On the other hand, others note that the employment of the gold exchange standard helped stabilize the exchange rate of the rupee against leading European currencies, thus supporting the development of Indian manufacturing industries under stabilized exchange rates. For the controversies which have arisen over colonial India’s exchange rate policy at the turn of the 20th century, see Bagchi (1989, Chap. 2) and Keynes (1913).

Regarding the development of the railway network in India during the colonial period, see Bogart and Chaudhary (2013, 2016), Hurd (1983), Kerr (1997, 2001, 2007).

Indian railway companies were owned and managed by three entities in colonial India: private shareholders, the government, and the princely states. Although the share of privately owned and managed companies was initially considerable, it continuously declined from the turn of the century on, when the Government of India began to nationalize the railway networks. According to Statistical Abstract, private companies owned 4,711 miles of railway lines in 1870, while public enterprises held only 63 miles. From the 1880s on, the share of public enterprises grew to 16,877 miles (including 2,575 miles of the princely states), while private companies owned only 3,953 miles by 1899. By the time of national independence, nationalization had placed much of railway management under the responsibility of the Government, although the management of some large government companies was entrusted to such private entities as the East Indian Railway, Bengal-Nagpur Railway and South Indian Railway. Government control of the railway industry in colonial India was to influence the pattern of TISCO’s development based on the Government’s strong preference for a specific quality of steel, as taken up in Chaps. 4 and 8. Bogart and Chaudhary have shown that since nationalization at the end of the 19th century, Indian railways have succeeded in increasing productivity (Bogart and Chaudhary 2013).

Efficiency improvement measures included a new line opening policy to connect prosperous markets with ports, a switch from wood to coal burning to reduce fuel costs and the promotion of Indianization (Debyshire 2007).

Bogart and Chaudhary note that the coal industry in India supported the railway industry during the second half of the 19th century, while also indicating that the contribution of fuel productivity growth to the productivity of the Indian railway industry was less than that of labour and capital productivity (Bogart and Chaudhary 2016).

Consumption is domestic production plus net imports. Domestic production data for the early 1880s were derived from Imperial Gazetteer of India (1909), and import data for 1878 from GOI, Statistical Abstract. Annual data for domestic production and net imports after the mid-1900s come from GOI (1925).

The coal yield in India in 1909 was ranked 9th among the leading coal producing countries of the world (Mitchell 1980, 1982, 1983).

India’s export shares of GDP were phenomenal compared to other Asian countries, whose shares for 1870 and 1913 included 0.2 and 2.4% in Japan, 0.9 and 2.2% in Indonesia, 0.7 and 1.7% in China and 0 and 1.2% in Korea (Findlay and O’Rourke 2003, p. 41).

For wages, Collins indicates that there was less apparent convergence, while he attributes the lower convergence to “relatively low rates of internal migration, weak Heckscher-Ohlin factor price convergence forces, and high climatic variability” (Collins 1999, p. 246). Roy has commented that Collins came to his conclusion based on the wage dataset of Prices and Wages, whose “wage-sample was a mix between market wages and customary wages,” concluding, “because customs changed relatively slowly, the presence of customary wages in the sample made the dataset less sensitive to labour mobility” (Roy 2007, p. 81).

Goldsmith (1983, pp. 10–2) also warns that the figures contain a substantial margin of error because of a severe shortage of reliable data. Here, money supply is approximately the total value of rupee coins and notes, one fifth of the net import of gold coins and current bank deposits.

This monetization was realized, as Goldsmith (1983, pp. 9–14) has argued, largely due to an increase in India’s balance of payments during the period, while was also a result of the financial deepening accompanying the development of banking facilities. Since the total money in circulation in the form of rupee coins and notes in 1870 and in 1913 was Rs. 1,024 and 2,410 million, the contribution of current deposits at banks, which was, according to Goldsmith’s assessment, almost three-fifths of total deposits, contributed considerably to the growth in the money supply. Continuous positive foreign trade and the progress of financial deepening increased the amount of money available in India throughout the second half of the 19th century.

While India had, as we show here, three different types of interest rate, there was also, according to Tomlinson (1979, pp. 8–9), “a three-decker system of credit institutions,” which consisted of UK exchange banks in the first tier, Indian and expatriate joint-stock banks at the second, and an indigenous banking sector at the third. Each type of interest rate and credit institution roughly corresponded to one of these tiers.

The Presidency banks, according to Goldsmith, “proved to be…the most durable and successful institutions of this type [Western-type bank], lasting in their original form [from the early 19th century] until 1921 and continuing to operate as before after their merger as the Imperial Bank of India until 1935, when several of their functions were taken over by the new Reserve Bank of India” (Goldsmith 1983, p. 26). The Presidency banks consisted of three banks, the Bank of Bengal, the Bank of Bombay and the Bank of Madras, among which the Bank of Bengal, was the oldest, having been established in 1809 by the East India Company. A detailed history of the Presidency banks has been published by Bagchi (1987, 1989, 1997). According to Goldsmith, “all three banks were, first, banks of issue, authorized by their charters to issue bank notes, originally up to the amount of their capital…second, banks of the East India Company and after 1857 of the British government of India, keeping the cash reserves and handling most of the financial business of the company or the government; and, third, British-type deposit banks which concentrated on the solicitation of deposits from the public and on granting short-term credit” (Goldsmith 1983, pp. 26–7). The Presidency banks were excluded from the foreign exchange business, which was in the hands of exchange banks (Bagchi 1989, Chap. 3).

The bank rates of the Banks of Bengal and Bombay were higher, at least, by 2% than those of the Bank of England during 1876–1914, while “the gap between the average prime rates charged by the presidency banks and the English bank rate” was narrowing in the final phase of the period after 1899 (Bagchi 1997, pp. 32–4, 61–4).

It was these indigenous bankers, or Shroff, who borrowed money from the Presidency banks while lending money to Indian borrowers (Bagchi 1989, p. 227).

In addition to three different interest rates, the Indian money market was characterized by huge seasonal differences in those rates (busy season January to June; slack season July to December). This seasonal fluctuation is reviewed, for example, by Bagchi (1989) and Keynes (1913).

The Hilton Young Commission on Indian Currency and Finance of 1926 noted the lower cost of money in Indian markets compared with the rates of “advanced countries.” Charlesworth notes this concern as follows: “that it is possible for India to borrow at a rate which compares favourably with the rate at which the most advanced countries can borrow at present is a matter of congratulation, and shows how high the financial credit of India stands” (Charlesworth 1985, p. 530).

Japan’s robust industrialization started in the 1880s, leading Japan’s manufacturing sector share (inclusive of small-scale industry) in total GDP to reach as high as 20% in 1897 and 33.3% in 1939. The India’s share in total NDP was 11.2% in 1900/01 and 21.9% even in 1970/71 (Ohkawa et al. 1974; Sivasubramonian 2000).

This is an assumption commonly held by some economic historians of India. For example, Morris writes, “Cheap labour typically worked against mechanization… To the contrary, the businessman was encouraged to expand existing organization rather than shift to techniques where capital requirements were relatively greater. And even where mechanized industries grew up, they invariably used more cheap labour per unit of capital than was true in the West. All this was a rational response to relative factor price relationships, but it slowed the expansion of factory organization” (Morris 1983, p. 555). A similar view is expressed in such recent studies as Gupta (2016) and Roy (2005, 2006).

To be precise, rental price = P(machine)x(real interest rate) + depreciation rate. Here, we assume that (1) machine prices in colonial India and imperial Japan were same or had same trends, and (2) deprecation rates in both countries were same.

Based on a case study in the early 20th century, Roy (1995) has noted that India’s bank rate (short-term lending rate) was only weakly related to investment in machinery equipment, indicating a weak connection between financial markets for short-term lending and long-term lending in colonial India.

This does not mean that there were no cases in which Indian banks supplied long-term capital; but such cases were few and far between (Bagchi 1972, p. 61).

The largest railway company in the 1920s, North Western Railway, was state-owned, and thus not counted among the twelve.

The number of cotton and jute mills indicates those mills operating under the Indian Factories Act of 1911, which was revised in 1922 to define a factory as any premises that was employing 20 or more persons and used machine power.

The ratio of the amount of paid-up capital in India to that of the national product was 0.13% in 1881 and 3.5% in 1913, suggesting steady growth in incorporation over those 33 years (Goldsmith 1983, p. 51).

In addition, the well-known “guarantee system,” under which the Government of India guaranteed a return of 5% for investors, assisted the Indian railways in meeting their capital needs in London (Bogart and Chaudhary 2016).

Almost all capital for railway construction in colonial India was obtained in Britain, a phenomenon that may have deprived India of the opportunity to develop financial institutions and procedures. However, the concentrated investment funding in Britain may have been inevitable due to the limited capacity of the Indian financial market to meet the huge capital demand for railway construction. According to Chandler (1990), such an opportunity arose in the United States during the second half of the 19th century.

Roy (2006) has noted the speculative nature of colonial India’s stock exchanges, suggesting their insufficient functioning.

Oral evidence of K. R. Shroff, president of Bombay Stock Exchange, at Bombay Stock Exchange Enquiry Committee on 23 November 1923, Financial Department, File 3819/4, p. 101, Maharashtra State Archives, Mumbai (MSA).

Ibid., p. 103, MSA.

Ibid., p. 135, MSA.

Ibid., p. 197, MSA.

The significant role of information networks knitted by close business associates or social groups for the purpose of financial transactions for industrial enterprises in colonial India is positively assessed by Gupta (2014, 2016).

Bagchi also writes, “When it comes to discovering the determinants of the supply of long-term foreign capital to other industries such as jute and coal, the managing agency houses with interests in a number of industries are naturally of the greatest importance” (Bagchi 1972, pp. 162–3). Chandavarkar (1994) and Gupta (2014) share the same view.

On the general features of agency houses and managing agencies, see Basu (1958), Hazari (1965, 1966), Jones (1992), Kling (1976), Lokanathan (1935), Monopolies Inquiry Commission (1966), National Council of Applied Economic Research (1959), Nigam (1957), Oonk (2001), Roy (2006, 2010), Rungta (1970) and Tripathi (2004).

Such dominance of family/community-centred financial transactions was not peculiar to colonial India. According to Colli and Rose (2009, Chap. 9), for example, family-based businesses represented a large share of total registered companies in many countries, even as late as the 1990s: 79–90% in Italy, 70–80% in Spain, 75% in the United Kingdom, 90–95% in Sweden, 95% in the United States, 60% in Germany and 90% in Brazil.

For example Morris argues that the wage trends of skilled labour, whose supply was limited in underdeveloped countries such as India, show different trends from those of unskilled labour (Morris 1965, p. 39).

Bagchi (1972, 2002) and Tomlinson (2013) share Morris’ view on this point.

Morris (1965) calculated wage indexes for unskilled labour based on the Government of India publication Prices and Wages, which he correctly understood had some weaknesses, stating, “The wage index was calculated from unweighted wage rates for the following job classifications: (1) scutcher, (2) card tenter, (3) grinder, (4) fly carrier, (5) drawing tenter, (6) slubbing frame tenter, (7) intermediate frame tenter, (8) roving frame tenter, (9) ring sider (double side), (10) spinning doffer, (11) gray winder (female 9), (12) reeler (female), (13) warper, (14) front sizer, (15) back sizer, (16) weaver (two loom), and (17) sweeper (female)” (Morris 1965, pp. 219–25). Incidentally, Morris has not clarified the reasons why he classified these occupation under the single category of “unskilled labour.”

Lal also argues that “in the pre-independence period, except for the relatively constant differential between the rural and urban unskilled wage, none of the other trends during the period support the view that there was a conventional, constant, real agricultural or industrial wage” (Lal 1989, p. 59), thus challenging the conventional view that there was a constant real wage in British India because of the vast amount of surplus labour.

Roy also writes, “The real wages of urban workers were 2–3 times that of agricultural workers in the inter-war period” (Roy 2006, p. 242). Based on an analysis of wage premiums (manufacturing wages relative to agricultural wages) for four industries (cotton mills, jute mills, coal, and iron and steel) in the first half of the 20th century, Wolcott (2016) supports Roy’s view.

To calculate wages for skilled labour, Lal used “the Prices and Wages series for 1857–88 period, the Roy and Roy series for 1888–97, the K. L. Datta series for 1877–1912 and the Sivasubramonian small-scale industrial wage series for 1912–46” (Lal 1989, pp. 28–9). However, he does not lay out the specific “skilled” occupations used for the calculation.

Bagchi also writes “it had become an almost universally accepted proposition by the beginning of the 1920s, that not only was ‘cheap’ Indian labour dear because of its low productivity, but it was also scarce in relation to the needs of the industry” (Bagchi 1972, p. 119).

The enhancing bargaining power of skilled and semi-skilled labour in the circumstance of worsening shortage of their supply might have formed one of the causes of continuing large scale industrial labour unrests after the early 1920s, when, as Chaps. 5 and 7 will show, historic labour unrests took place at TISCO as well.

Concerning the cotton mill labour market in colonial India, see Morris (1965, 1983) and Chandavarkar (1994).

Gupta (2016, p. 74) notes that the “jobber” system held an advantage in the gathering of necessary information for labour management compared to other types of system, in which a unit within a business corporation would be required to conduct this same task. Roy (2009a, 2010, Chap. 5) shares this view.

Chandavarkar notes the salience of the “neighbourhood” for the “jobber” system as follows. “It was within the neighbourhoods that the reciprocal nature of power relations within the jobber system was most obviously manifested. It was in this arena that the growth of working-class militancy most severely circumstanced the possibilities of jobber power” (Chandavarkar 1994, p. 200).

The “jobber” system has been sometimes presumed to have been an institution peculiar to India; however, Chandavarkar (1994, p. 100) rejects such a view, stating, “the term jobber derived from Lancashire where it entailed an essentially technical, repair and maintenance function. In any case, foremen in British industry also played a major role in the recruitment of labour and their involvement in the social organization of urban neighbourhoods has not perhaps been sufficiently acknowledged by historians. Similar agents are to be found as commonly in the recruitment and organization of labour in Africa, as in China or Japan.” Gospel (2009, pp. 425–426), a labour historian by trade, endorses Chandavarkar’s understanding. What was peculiar to colonial India was that such a management system continued to be utilized even after business corporations had grown in scale and scope, as discussed in greater detail in Chaps. 5 and 7. In other industrialising countries, such an indirect management system was replaced as early as the turn of the 20th century by a direct system, in which top management directly recruited and governed middle management and job floor workers.

The importance of changes in the government’s approach to the development of the iron and steel industry has also been noted by Tomlinson (2013).

According to Roy (2009b, pp. 594–595), Heath’s attempt began to face difficulties as early as the 1840s, due to “the costs of labour and materials,” some of which were caused by an inefficient transportation system.

R. C. von Schwarz, Reports on Iron Working in the Raniganj Sub-division of the District of Burdwan in Bengal, 1882, General Reference Collection V/27/612/9, p. 1, British Library.

Ibid.

R. C. von Schwarz, Report on the reopening of the Bengal Iron Works for the production of 80 tons casting per 24 h in Reports on Iron Working in the Raniganj Sub-division of the District of Burdwan in Bengal, 1882, General Reference Collection V/27/612/9, pp. 3–4, British Library.

Ibid., p. 4.

Ibid.

C. M. Weld, Progress report on iron and steel manufacture in Central Provinces of India, 1903, Weld Papers, File A 24, Tata Steel archives, Jamshedpur, India.

These same obstacles to greater efficiency of the iron industry seriously influenced enterprises such as TISCO in the early 20th century, as we shall see in the following chapters.

One sterling pound was being exchanged at a rate of close to Rs. 12 in the early 1880s (Shirras 1920).

This financial stringency also led to policy changes in tariffs. After the 1880s, the Government began to consider possible ways to revise tariff rates for industrial products with minimum damage to the principle of laissez faire (Riders 1971, Chap. 2).

BISCO continued operations until the early 1930s as one of colonial India’s important pig iron producers, while the company merged in 1936 with the Indian Iron and Steel Company, whose managing agent was Martin Burn and Company. The amalgamated company, named the Steel Corporation of Bengal, began to produce steel in 1940 and “by 1945 supplied about one-fifth of the market” (Tomlinson 2013, p. 108).

Extract from the proceedings of the Government of India, Geology and Minerals—A (Department of Revenue and Agriculture), 20 May 1899, pro. 18, file no 17 of 1899, p. 1, National Archives of India, Delhi, India (NAI).

Ibid., p. 3.

Relaxation of rule 19 of the mining rules in Bengal to the area of blocks leased to the Bengal Iron and Steel Company, Geology and Minerals—A (Department of Commerce and Industry), August 1908, pro. 2-3, NAI.

Ibid.

Ibid.

Bahl (1995, Chap. 1) notes that the government decision to adopt economic measures to assist indigenous iron and steel producers was due to a rise in the international competitiveness of non-British steel, which had succeeded in expanding its market occupancy rate in the iron and steel market of India since the end of the 19th century. The declining share of British iron and steel which resulted, created, according to Bahl, a setting for the Government of India to positively promote indigenous iron and steel companies. Such a point of view should be called into question, however, in light of the fact that British and Indian iron and steel producers were direct competitors in the Indian market. As will be detailed in Chaps. 4 and 8, Indian-made steel was of the same quality as British-manufactured steel because of the Government of India’s store purchasing regulations, while non-British foreign steel was of a lower quality and cheaper in price. It is difficult to fathom such a situation, proposed by Bahl, as Britain and India being direct competitors, both of whose market shares were declining, resulting ipso facto in a setting for the Government of India to promote indigenous steel makers.

The contract stipulated that the amount paid would be reduced by Rs. 3 for every ton of steel purchased by the Government.

Some restrictions were still in force. The purchases of wheels, axles, and springs of rolling stock were not permitted; the purchase of railway bridges up to 150 feet only was permitted.