Law and the Economy in Colonial India

by Tirthankar Roy and Anand V. Swamy

University of Chicago Press, 2021
Cloth: 978-0-226-38764-2 | Electronic: 978-0-226-38778-9
DOI: 10.7208/chicago/9780226387789.001.0001

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ABOUT THIS BOOKAUTHOR BIOGRAPHYREVIEWSTABLE OF CONTENTS

ABOUT THIS BOOK

Since the economic reforms of the 1990s, India’s economy has grown rapidly. To sustain growth and foreign investment over the long run requires a well-developed legal infrastructure for conducting business, including cheap and reliable contract enforcement and secure property rights. But it’s widely acknowledged that India’s legal infrastructure is in urgent need of reform, plagued by problems, including slow enforcement of contracts and land laws that differ from state to state. How has this situation arisen, and what can boost business confidence and encourage long-run economic growth?

Tirthankar Roy and Anand V. Swamy trace the beginnings of the current Indian legal system to the years of British colonial rule. They show how India inherited an elaborate legal system from the British colonial administration, which incorporated elements from both British Common Law and indigenous institutions. In the case of property law, especially as it applied to agricultural land, indigenous laws and local political expediency were more influential in law-making than concepts borrowed from European legal theory. Conversely, with commercial law, there was considerable borrowing from Europe. In all cases, the British struggled with limited capacity to enforce their laws and an insufficient knowledge of the enormous diversity and differentiation within Indian society. A disorderly body of laws, not conducive to production and trade, evolved over time. Roy and Swamy’s careful analysis not only sheds new light on the development of legal institutions in India, but also offers insights for India and other emerging countries through a look at what fosters the types of institutions that are key to economic growth.

AUTHOR BIOGRAPHY

Tirthankar Roy is professor of economic history at the London School of Economics and Political Science. He is the author of India in the World Economy: From Antiquity to the Present and The Economic History of India 1857–1947.Anand V. Swamy is professor of economics at Williams College. He is coeditor of A New Economic History of Colonial India.

REVIEWS

“Indian civil courts are notorious for a backlog of cases and a slow process of dispute resolution—arguably a major retardant to India’s economic growth. Yet, at the same time, Indian courts draw upon British legal origins, particularly the common law, which has been credited for being relatively responsive and flexible to contractual needs in cross-country comparison. By incorporating cutting-edge concepts and debates in the economic literature on law and development with a rich historical discussion of the law in the Indian context, Roy and Swamy go a long way toward explaining this paradox. This is an interesting and well-written work on a very important topic.”

— Saumitra Jha, Stanford Graduate School of Business

“As Britain took over Indian territories in the nineteenth century, the colonial authorities found themselves trying to adapt religiously-based legal codes to the needs of a growing economy. Roy and Swamy provide a wonderful overview of this process. The Raj’s approach to law and regulation surely plays some role in India’s sclerotic state today. That the Indian economy continues develop even with this constraint raises a set of rich questions about the role of law in economic development.”

— Timothy Guinnane, Yale University

“Although colonial institutions have been blamed for wealth and poverty around the world, no one has analyzed how they developed over the entire history of colony—no one, that is, until Roy and Swamy. Their novel research in Law and the Economy in Colonial India lays bare the political and administrative problems that shaped the evolution of Indian legal institutions, with major economic consequences that persist to this day.”

— Philip T. Hoffman, California Institute of Technology

“Among emerging economies, India stands out for having a legal system that is both highly sophisticated and cumbersome. How did this come to be? Roy and Swamy’s book is a masterly study of India’s complex legal codes and customs that predated the arrival of East India Company, the brew that was created by the colonial masters modifying and bringing in English Common Law, and the further changes that occurred at independence. This is a book that is fascinating to read and one that will be of as much interest to the historian as to the economic policymaker.”

— Kaushik Basu, Chief Economist of the World Bank, Cornell University

"This is a splendid book, both explaining the evolution of much law in British India and tracing the origins of legal impediments of today’s Indian economy. Much has been written about such questions, but never before has there been such a balanced and convincing overview."

— South Asia @ London School of Economics Blog

"Analyzes the evolution of British Indian law in the colonial period, considers why the process might have made market exchange more difficult, and explores how European colonial rule aided or obstructed institutional modernization in the non-European world."

— Journal of Economic Literature

One / Introduction - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0001
[indigenous;colonial;contract enforcement;Indian economy;British rule;Raj]
The Indian economy has grown rapidly in the last three decades despite a weak legal system. For instance, India ranks extremely low in the ease of contract enforcement, which is usually considered a key element of a growth-supportive environment. Why is this so? Part of the answer comes from India’s colonial period, when the foundations of today’s legal infrastructure were laid. Law in colonial India did respond to the needs of economic actors, but British Indian law also had other compelling objectives and faced many constraints. A key goal was to help maintain British political control over the subcontinent. It was also expedient, especially in the early phase of British rule, to draw on existing indigenous traditions in law, sometimes religious, and sometimes “customary.” The legal system was also affected by the Raj’s limited administrative capacity and by resource constraints. Borrowing from British legal precedent was not always done judiciously. The outcome was an incoherent entity,increasingly dysfunctional by the end of the colonial period. (pages 1 - 9)
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Two / The Process of Legislation, 1772–1857 - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0002
[East India Company;lex loci;Islamic scriptures;codes]
Between 1765 and 1818, the British East India Company came into possession of more than half of the Indian subcontinent, and by 1858, this territory was taken over by the Crown. This chapter describes the evolution of the British Indian judicial system during these years. The legal framework that the Company instituted in India was modelled on a set of codes derived from Hindu or Islamic scriptures. By 1857, the general sentiment was that lex loci could not be constructed on the foundation of religion, as scriptures as well as British ideas about Indian society were often at odds with the reality of the dispute in the court-room. (pages 10 - 26)
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Three / Landed Property: Security and Incentives - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0003
[property rights;customary rights;tenants;rent;eviction]
The Raj usually conducted its discussions on property rights in the language of economic theory: Secure and well-defined rights would best promote economic development. But in reality practical considerations dictated policy. At the outset the Raj’s main objective was to obtain sufficient land taxes – “proprietary” rights were assigned primarily with this goal in mind. The state acknowledged that others, besides the proprietor, might have customary rights, but it did not have the detailed local-level information to know what they were, nor the capacity to enforce them. So they were only paid lip-service. Over time the Raj responded to political pressures and incrementally provided some tenants in some regions protection from eviction and rent increases. But as the complexity of law increased so did ambiguity and conflict, which was also fueled by other stresses on the economy. Landlord-tenant conflicts escalated and spilled into courts, sometimes overwhelming them. None of this was good for economic growth. (pages 27 - 53)
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Four / Landed Property and Credit - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0004
[usury;Depression;credit;immigrant;crop failure;land transfer law]
The institutional changes introduced under British rule in the 19th century made it easier to transfer land. Peasants could now borrow against land, and it could be seized when they failed to repay. It was inevitable that some peasants, faced with disasters such as crop failures or falling prices for their produce, would lose their land to lenders. This was not politically problematic when the lender was a local resident, probably a rich peasant. This was usually the case in relatively prosperous regions. But in poor and dry areas the lender was often an immigrant. Peasants who lost land to immigrants rioted in some areas. Fearing widespread political unrest, the Raj introduced legislation to reduce land transfer. In some instances land transfer was directly restricted, but more common measures involved regulating the moneylender-borrower relationship via usury laws, limits on interest accumulation, and debt-relief, which allowed the borrower to pay less than was owed. A slew of such legislation was passed after the Depression, when many peasants were hard-pressed to repay loans. Thus, whatever its commitment to laissez-faire, the Raj heavily regulated transactions in land and credit. (pages 54 - 79)
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Five / Succession of Property: Joint versus Individual Right - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0005
[testamentary;inheritance;joint family;Hindu law;law of succession]
Whereas agricultural property invited specific legislation, the law of succession and inheritance outside agriculture initially upheld the rights of the joint family in such matters, as set out in classical texts on Hindu law. In a commercializing environment, the decision to empower a collective body gave rise to disputes. For example, disputes occurred over the question, in a family firm of merchants, who had a stronger claim to inherit property, the partner or the son? When religious law privileged the claim of an heir on spiritual grounds whereas others’ claims could be justified on grounds of equity or efficiency, what should the judges do? By what law would testaments be prepared and accepted in the courts? The history of legislation in property rights (excluding agricultural land) is a history of a gradual strengthening of testamentary powers of individuals overriding the right of the collective. (pages 80 - 103)
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Six / Labor Law: From “Slavery” to Trade Union - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0006
[slavery;indentured labor;Master and Servant Act;breach of contract;trade union;Tea]
The colonial state’s attitude towards labor varied hugely across time and space. In the early years of British rule, the East India Company drew on local practices as well as British precedent to coercively obtain the services of workers. At the same time, in deference to political changes in Britain, it legislated to abolish slavery. By the second half of the 19th century, as workers began to migrate long distances, the Raj drew on the British Master and Servant Act and passed legislation criminalizing breach of contract by migrants whose travel costs had been paid by their employers. Particularly harsh legislation was passed in relation to workers migrating to Assam’s famous tea plantations. Indentured labor contracts remained legal in India until the mid-1920’s, long after they had been jettisoned in Britain. In a quite different terrain, the factory, legislation to protect workers was gradually introduced, beginning in the late 19th century. Workers gained the right to form trade unions, and a sometimes-militant labor movement emerged. By the end of the colonial period, tension between Indian capital and labor was driving legislation. (pages 104 - 122)
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Seven / Contract: Late Westernization - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0007
[commercial law;Indian Contract Act;codification;trade disputes]
As in property, in commercial law, an initial preference for recourse to indigenous law and practices needed to change. The idea of a contract law did exist in India, and British jurists tried to revive these laws. But the revived laws were never actively used. Impersonal and secular laws of business could not be found written down anywhere; no courts existed where such laws had been recently applied, whereas at the same time, the scope of business transactions between parties that did not share similar customs expanded enormously. The response to this uncertainty was the Indian Contract Act, 1872, which broke with indigenous law and custom. But the journey towards codification was marked by trade disputes, one of which was particularly violent. The chapter describes this journey. (pages 123 - 141)
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Eight / Corporate Law: Flawed Westernization - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0008
[Partnership Act;Company Act;managing agency]
Although the joint family covered some aspects of the organization of business firms, it was neither a stable notion nor a comprehensive one in the face of new enterprises formed of unorthodox partnerships and, especially, industrial firms that needed to gather both capital and managerial labor from a much wider pool than the family. The chapter presents a chronological account of the Partnership Act and the Company Act, the response to the needs of firms. The chapter then concentrates on a peculiarly South Asian institution, the managing agency, and shows that even as the Company Acts became progressively more complex, the agency system remained curiously under-legislated. (pages 142 - 158)
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Nine / The Burden of Procedures - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0009
[procedural law;Indian case law;Indian tradition]
In the second half of the nineteenth century, a legislative drive led to the creation of a number of specific laws. The state clearly saw itself as much more than a custodian of Indian notions of law and justice, as it did before 1857. It was now deliberately trying to create a comprehensive framework of substantive and procedural law, while drawing upon western concepts and Indian case law freely for that purpose. And yet, the legislative drive led to an upsurge in litigation. Apparently, the courts and the laws created new problems while solving old ones. For example, there were frequent overlaps between different laws for a certain type of dispute, the one between contract and procedure being especially common. The move from one driver (preserving Indian tradition) to another (a modern universal legal framework) had apparently ended up producing too many laws for the same dispute. (pages 159 - 172)
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Ten / Conclusion - Tirthankar Roy, Anand V. Swamy
DOI: 10.7208/chicago/9780226387789.003.0010
[industrial regulation;frivolous suits;gender equity]
India’s judicial system is today widely viewed as highly dysfunctional. The legal inheritance from the colonial era is partly to blame. Complex and contradictory legislation on land rights led to disputes which clogged colonial-era courts. This problem has only intensified in independent India. The colonial-period decision to link “personal” law pertaining to matters such as divorce and inheritance to religion has had long-term consequences. It is now difficult to address issues of gender equity because they are linked to religious freedom. Independent India also inherited a style of litigation in which judges permit frivolous suits as well as various appeals and adjournments which lead to delay. We see continuity between the colonial period and independent India in all these trends. In some other areas such as labor law and industrial regulation, complexity and over-regulation are the result of choices made by post-independence governments, which adopted a far more interventionist role in the economy than the British Raj did. Here the story is one of rupture, rather than continuity, with the colonial period. (pages 173 - 178)
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