In this article we will discuss about the Indian fiscal policy:- 1. Introduction to the Indian Fiscal Policy 2. Changes in the Indian Fiscal Policy after World War I 3. The Policy of Discriminating Protection 4. Working of the Indian Fiscal Policy 5. Achievements of the Indian Fiscal Policy of Discriminating Protection 6. Fiscal Policy during World War II 7. The Second Fiscal Commission, 1949-50 and Other Details.
Contents:
- Introduction to the Indian Fiscal Policy
- Changes in the Indian Fiscal Policy after World War I
- The Policy of Discriminating Protection
- Working of the Indian Fiscal Policy
- Achievements of the Indian Fiscal Policy of Discriminating Protection
- Fiscal Policy during World War II
- The Second Fiscal Commission, 1949-50
- Critical Appraisal of the Indian Fiscal Policy
- Imperial Preference of the Indian Fiscal Policy
1. Introduction to the Indian Fiscal Policy:
The history of the Indian tariff has been a history of the clash of commercial interests. In the early days, the East India Company was interested in developing Indian cottage industries from which its export trade was largely drawn. It, for example, helped to organise and finance cotton and silk piece-goods and silk yarn which had a ready sale in the European markets.
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There soon arose a clash of interests between the East India Company and the industrial houses of England “which were sufficiently powerful to insist that it should be suspended and that the company should instead concentrate on the export from India of the raw-material necessary for manufactures in England.”
In course of time, the company became a mere tool in the hands of these vested interests who used tariff as a weapon to injure the Indian cottage industries.
By the time the crown rule was established in India, England had become the foremost industrial and commercial nation of the world. She needed not only unhindered supplies of raw-material but also unrestricted markets for her expanding industries. Meanwhile, the era of free trade had set in England.
The very country, which had imposed high import duties on articles like silk and cotton goods from India, now began to preach the gospel of free trade to her colonies. What was good for England was supposed to be good for her colonies also.
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Thus arose another clash between the interests of Indian industry which needed encouragement and protection for her survival and the English trade and manufacturing which required free trade for its expansion. The clash was once again resolved in the total sacrifice of Indian interests for the prosperity of British trade and Industry.
The financial difficulties resulting from the Rebellion of 1857 had forced the government to raise, in 1859, the import duty on cotton twist and yarn to 5% and on other articles to 10%. Next year, the duty on cotton twist and yarn was also raised to 10%. However, soon under pressure from British traders and cotton manufacturers, a process of tariff reform and reduction was set in motion.
The duty on cotton yarn was reduced to 5% in 1861 and to 3½ in 1862; the duty on cotton manufactures was brought down to 5% in 1862; and the general import duties were reduced from 10% to 7±% in 1864 and to 5% in 1875. This was the beginning of the movement by which, under cover of Free Trade Principles, the interests of Manchester were advanced at the expense of Indian industry.
Even these reduced duties, especially on cotton manufactures, came under heavy attack from the Lancashire cotton manufacturers. In 1874, the Manchester Chamber of Commerce complained about a growing protected trade in cotton manufactures in India and prayed for the abolition of import duties levied on them.
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It is well to remember in this connection that by 1870’s, many western countries like Germany and U.S.A., under the stimulus of protection, had begun to emerge as industrial rivals of England. Germany raised a tariff wall in 1879; France followed in 1881, Russia in 1881-82; America raised her tariff in 1890 and 1897.
Even British Colonies were not far behind; Canada raised tariff in 1897 and Australia in 1900. As tariffs rose in Europe and America, the market for British cotton textiles was considerably narrowed and England was left with only India and China to fall back upon.
The English cause found its most ardent advocate in Lord Salisbury who repeatedly emphasised the necessity of removing the import duties on cotton goods with a view to placing the industry on a solid foundation, and of removing the growing cause of “conflict between the manufacturing interests of England and India which may before long become a political difference.”
The government refused to oblige on the ground that the duties were not protective. However, with a view to softening criticism, a duty of 5% was imposed on the import of long staple cotton. The pressure, however, continued undiminished.
In 1877, the House of commons passed a Resolution that the cotton duties were protective in their nature and “being contrary to sound commercial policy” should be repealed without delay.
It had its effect when, despite financial difficulties created by the Afghan War, recurring famines, and depreciation of Silver, the duties on certain coarser varieties of cotton goods were remitted in 1878 and on all other cotton goods in 1879.
Further opportunity came in 1882 when cotton duties along with duties on most other commodities except Salt and Liquor were abolished in toto.
Meanwhile, steps had already been taken to as well abolish export duties which had been levied at a rate of 3% advalorem on practically all except certain specified articles. Beginning in 1859, these duties were gradually abolished so that by 1880, all articles except rice were exempted from the payment of these duties.
The success of free trade principles was complete. The Indian interests had been fully subordinated to the overriding requirements of English industry. The ports of agricultural India now became more open to the industries of the world than the free ports of England herself.
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The few industries, which had just begun their precarious life, were now ‘free’ to compete with the advanced industries of England or the protected industries of the rest of the world.
For a period of 12 years between 1882-1894, the Indian custom tariff was modelled on the Free Trade Principles. It was, however, not destined to last longer. The construction of railways at fast pace, the rising military expenditure, and the falling exchange rate imposed fresh burdens on the Indian finances. Such measures as the imposition of import duty on Petroleum and increase in salt duty did not bring much relief.
Matters came to a head in 1894 when the government, faced with a deficit of Rs. 3.5 crores, desperately looked around for new sources. And finding none, it re-imposed a 5% duty on all imports. In deference to the Lancashire interests, a countervailing excise duty of 5% was imposed on Indian Yarn as well.
This excise duty, which had previously been rejected as ‘costly, vexatious and inconvenient’ was re-imposed not for the sake of revenue but in order to remove any element of protection which the Indian textile industry might have enjoyed.
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And yet, the British manufacturers appetite was not fully satisfied and they continued their agitation for the removal of the remotest sign of protection to their helpless dependency. Again the government obliged; the import duty on cotton manufactures was reduced from 5% to 3.5% in 1896 but simultaneously, an excise duty of 3.5% was imposed on cotton cloth produced in Indian mills.
The measure resulted in a remission of taxation amounting to Rs. 51.5 lakhs or 37% on imported goods and an increase of Rs. 11 lakhs or 300% in taxation on Indian goods. The loss was accepted despite the fact that there was a deficit, that the Afghan war was going on, that the exchange was falling and that the protective measures against famines had to be suspended.
Thus ended the controversy “When Manchester saw to her gratification that she had left no possibility of even a nominal competition on the part of her Indian rival.”
The tariff system, as established in 1894, remained un-altered in its main essentials till the First World War. In general, it consisted of a low uniform rate of duty imposed on nearly all imports except railway materials, machinery and iron and steel which were admitted duty free.
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The financial burden imposed by the I world war necessitated an enhancement of the tariff rate. In 1916, the general rate was raised from 5% to 7.5%. Exemptions were reduced; machinery other than that for cotton mills, railway materials, iron and steel were now taxed at 2.5%; duties on liquors and tobacco were considerably raised and sugar was subjected to a 10% duly.
In 1917, it was decided to make a special war contribution of £ 100 million to England and this made it necessary to impose further taxes. Cotton duty was raised to a general level of 7.5% while export duties were levied on tea and jute. In 1921, when the government was faced with an unprecedented deficit, tariff was further raised to 11%. This rate covered cotton textiles also.
The government’s difficulties, however, remained unsolved and, therefore, in 1922, the general rate of duty was further raised from 11% to 15% the duty on matches was doubled and that on sugar raised from 15% to 25%.
To sum up. The fiscal policy of the Government of India, up to 1923, remained largely free trade in its working, and revenue of the government rather than the well being of the country was the dominating consideration in deciding upon the tariff rates. On top of this, came the direct and indirect influence of the British Big Business who glorified free trade to suit its purpose.
2. Changes in the Indian Fiscal Policy after World War I:
The end of the I world war saw certain significant developments. In the first place, foreign competition had begun to break down the British monopoly in the Indian market where her rivals, quickly seizing the opportunity, had penetrated in several directions. The danger was, as Hardinge explained, that India would become “the dumping ground for the manufactures of foreign nations.”
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In the second place, the end of the war witnessed a tremendous upsurge of the Indian freedom movement. In order to maintain control of India in that disturbed period, it was essential to secure the cooperation of the Indian ‘bourgeoisie’ by offering certain economic and political concessions.
In the third place, the war had proved that if the British wanted to retain India as a colony and safeguard their position elsewhere in Asia, they had to create an adequately developed industrial base in the country. One concrete result of these developments was the introduction of a system of protection in India.
In August 1917, a resolution was passed in the British Parliament which envisaged “Progressive realisation of responsible government in India as an integral part of the British Empire.”
The joint select committee, which examined the Government of India Bill 1919, recognised that fiscal freedom should not lag behind political freedom. It, therefore, recommended the establishment of a convention that “the Secretary of State should, as far as possible avoid interference on this subject (of fiscal policy) when the Government of India and its legislature are in agreement ….”
The Fiscal Autonomy convention, accepted by the Secretary of State for India in 1921, was a landmark in the history of fiscal policy in India. It paved the way for the appointment, in 1921, of the Fiscal Commission “to examine with reference to all interests concerned, the Tariff policy of the Government of India, including the desirability of adopting the principle of Imperial Preference.”
3. The Policy of Discriminating Protection:
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The Commission, after a careful investigation of existing conditions, came to the conclusion that the Industrial development of India had not been ‘commensurate with the size of the country, its population, and its natural resources.’
In order to secure steady industrial progress, the commission advocated the policy of protection for India, but in order “to make the burden as light as is consistent with the due development of industries and avoid abrupt disturbances of industrial and commercial condition” the commission recommended discrimination in the industries selected and in the degree of protection afforded.
In other words, all industries were not to be protected, but a careful selection was to be made, and only those industries were to be given protection which fulfilled certain conditions. This inaugurated the policy of Discriminating protection in India.
The Commission laid down the following three conditions for the grant of protection to an industry:
(a) “The industry must be one possessing natural advantages, such as an abundant supply of raw-materials, cheap power, a sufficient supply of labour or a large home market.”
(b) “The industry must be one which, without the help of protection, either is not likely to develop at all or is not likely to develop so rapidly as is desirable in the interest of the country.”
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(c) “The industry must be one which will eventually be able to face world competition without protection … .”
In addition to these three main conditions, known as the Triple Formula, the commission laid down certain subsidiary conditions which, though not essential, were to be regarded as factors favourable to the grant of protection.
These were:
(1) “An industry in which the advantages of large scale production can be achieved … is a particularly favourable subject for protection.”
(2) “Another industry which should be regarded with a favourable eye is that in which there is a probability that in course of time the whole needs of the country could be supplied by the home production.”
(3) “… any industry which is essential for purposes of national defence, and for which the conditions in India are not unfavorable should … be adequately protected irrespective of the general conditions … laid down for the protection of industries.”
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For the successful working of the Scheme, the Commission recommended the appointment of a “thoroughly competent, impartial and permanent. Tariff Board” charged with the duty of making detailed enquiries into the claims of protection … and to express its conclusions in the form of detailed and definite recommendations.
The Commission felt convinced that the mere imposition of protective tariff would not, by itself, produce full industrial development and, therefore, recommended several supplementary measures such as changes in railway rates, greater emphasis on technical education and replacement of imported skills for promoting the growth of industries.
The above recommendations were not endorsed by five out of the eleven members of the commission. The minority objected to the policy of Discriminating Protection on the ground that it mixed up policy with procedure and laid down such rigid conditions as to impart the industrial progress of the country.
In their opinion, the fiscal policy best suited for India was protection “to be regulated by the government and Indian legislature from time to time by such discrimination as might be considered necessary in the best interests of India.” The Minority was also against Imperial Preference and wanted certain conditions to be imposed on foreign capital in India.
The Policy of Discriminating Protection, as recommended by the majority of the commission, was accepted by the government in 1923 but with some limitations. The Resolution accepted by the Assembly did not refer to the non-fiscal recommendations which were considered equally important by the commission.
Further, the government appointed only Adhoc Boards in place of a permanent one recommended by the commission.
4. Working of the Indian Fiscal Policy:
The policy of Discriminating protection came in for severe criticism which mainly centered around the conditions laid down for the selection of industries for protection. The First condition regarding natural advantages was one which ultimately boiled down to cost of production.
Therefore, an examination of the cost of production in each industry would have been a more scientific approach to the problem than a mere description of natural advantages.
In fact, on the basis of this interpretation, the tariff board recommended protection to Glass industry although Soda Ash was not available in India, stating that dependence on imported materials was not a bar to protection provided the final costs justified it.
Similarly, in the case of the Heavy Chemicals industry, the Board observed that the absence of Sulphur in India was not an inseperable objection. And yet the government, attaching undue importance to the raw material part of the condition, disregarded the recommendation of the Board and refused protection to glass, chemicals and the worsted section of the Woolen industry.
Another serious flaw was that it laid unnecessary emphasis on the existence of an internal market as a condition for the grant of protection. As Professor Vakil points out, “if Britain keeps industries fed by foreign raw materials and is dependent upon foreign consumers there is no reason why India should not encourage industries which can be fed by her own materials irrespective of the market.”
But the government thought otherwise and denied protection to the locomotive industry on the ground that the home market was not large enough.
Apart from this, the Triple Formula was mutually ‘incompatible and inconsistent.’ If the first condition was satisfied, it was impossible to fulfill the second for there is no industry which possesses all the natural advantages and yet is not able to develop without protection. The Formula thus set a mutually contradictory task to the Industry applying for or enjoying protection.
The cement industry, for instance, fulfilled the first condition extremely well owing to the plenitude of natural advantages but it could not satisfy the Second and was refused protection. The case of the Tata steel was more ridiculous when it blew hot and cold by explaining its improved financial condition and, at the same time, describing its troubles least protection might be withdrawn.
While the first two conditions were mutually contradictory, the third was ‘illogical and superfluous’. In fact, ‘the first condition itself was explanatory of the Third’, or any estimate of whether an industry would be able to eventually stand on its own feet or not had to be based on the First condition, viz, availability of raw material, market, etc. The Triple Formula, therefore, was a misleading one.
The Commission had recommended the constitution of a permanent Tariff Board. The govt. instead appointed Adhoc Boards for a duration not exceeding one year in the first instance. This practice of appointing different boards at different times “prevented the taking of long term views, the accumulation of experience and the building of an efficient body of technique and procedure.”
Besides, these Boards had to function under certain limitations. They had neither any power to initiate enquiry nor to summon witnesses. Absence of such power was particularly left in the case of foreign enterprises which often did not cooperate. For instance, the Swedish Match company refused to disclose, even in confidence, the cost figures of their factories in Sweden.
Worse still was the case of the non-worsted section of the woolen industry where the govt. refused to accept the recommendation of the Board for the grant of protection on the ground that the British controlled section of the industry had not tendered evidence and that the Board’s findings did not apply to the industry as a whole.
The very composition of the various tariff boards would suggest that the Boards were appointed largely with a view to securing easy acceptance of the govt’s views. In fact, as Adarkar points out, any expression of nationalist or protectionist sentiment was a sure disqualification.
This is evident from the fact that of the total number of 113 positions on the various enquiries, 71 were held by the govt. officials themselves and only 42 by non-officials.
The restrictive nature of Discriminating protection was made doubly so by the dilatory and difficult procedure laid down. The govt. was not bound to refer every application to a Tariff Board; the Tariff Board was not bound to submit its report within a specified period of time; and finally, the govt. was not bound either to accept the recommendations of the Board or the resolution of the Legislative Assembly if it ran counter to govt. proposals.
The authorities at all levels had their own notion about the time factor in the urgency of protection which was often granted when the industry was on its last legs. In the case of Match and Sugar industries, two years elapsed before protection was announced; in that of textiles, the Board and the govt. together took 2½ years before protection was granted.
At the other end, woolen industry waited for 2½ years and glass for three years only to be told that protection could not be given.
Delay by itself would not have been so objectionable were it not for the fact that the Commerce Department, in every case, sat in judgement upon the reports which were submitted by the tariff board after “laborious, searching and meticulous enquiries.”
The Triple Formula did not recognise the importance of developing ’embryo’ or ‘potential’ industries. The Board’s view was that “there was no need for protection unless there was something to protect.” The system of Imperial Preference, under which British goods were given preferential treatment by way of lower import duties, further reduced the utility of Discriminating Protection.
According to R.P. Rutt, the Policy of Discriminating protection was introduced in-order “to prepare the way for Imperial Preference” so that England could win back the Indian market from her rivals.
Accordingly, protection was given only to such industries as did not clash with British interests. For example, in Steel, India competed with Belgium and other continental countries; in textiles, with Japan and China in inferior varieties; in gold thread, with France; in Sugar, with Java; in Plywood and tea chest industry, with Finland.
In all these Industries, there was no clash between Indian and British interests and they were, therefore, favoured with the grant of protection. In the case of cement, however, the British and Indian interests were in direct conflict and that is why it was left to work out its own salvation.
In the case of Heavy chemicals, protection was directly opposed to British interests. That explains why, after a great delay, the industry was given temporary fiscal aid to be left high and dry within 18 months. The case of Magnesium Chloride was different for here the competition was with Germany.
That is the reason why, of all chemicals, Magnesium Chloride received protection at the hands of the govt. It shows that, under the circumstances, there was hardly anything like Fiscal Autonomy. Had India been free, the Policy of protection would have been directed as much against England as against the rest of the world.
Furthermore, the period for which tariff protection was given was often far too short. Except in two or three cases, the maximum period of protection was limited to seven years. In not a few cases, especially in the early days of the experiment, the period was limited to three years.
It is also noteworthy that, in some cases, protection was withdrawn temporarily or finally, or reduced substantially, e.g., protection was withdrawn temporarily or finally, or reduced substantially, e.g., protection was temporarily withdrawn from Steel Wire and Wire nails in 1927-32; it was finally withdrawn from various chemicals except Magnesium chloride in 1933; and it was substantially reduced in the case of a large variety of steel products under the Act of 1934.
In view of this, new entrants in the industry did not feel sure of govt. help against foreign competition. The most fundamental defect was that protection was not visualised as an instrument of general economic development but was viewed as a means of enabling particular industries to withstand foreign competition.
In others words; it was of a ‘safe-guarding variety.’ As Professor Bal Krishna points out, there was neither a comprehensive scheme of development nor a bold approach to implement it. The result was a lop-sided development of Indian industries.
5. Achievements of the Indian Fiscal Policy of Discriminating Protection:
In-spite of these limitations, discriminating protection was not without some tangible results. Between 1923-39, the tariff boards conducted in all 51 enquiries. These included fresh applications for protection, cases for renewal or revision of the quantum of protection and a few technical matters.
The government accepted the Board’s recommendations without any change in 34 cases, in ten of which the Board had rejected the claim for protection. In all cases, government modified the recommendations before accepting them. The Board’s recommendations for protection were rejected in six cases. The number of industries which actually received protection was thirteen.
They were Iron and steel including subsidiary steel industries, cotton textiles, Paper and Paper Pulp, Matches salt, Heavy Chemicals, Sericulture, Magnesium Chloride, Plywood and Tea chests, Gold thread, wheat and rice, the last two having been protected on government’s initiative without reference to the Tariff Board. Among the industries denied protection were cement, glass, coal, Petroleum and Woolen.
The main advantage of the policy was to enable the protected industries to remain comparatively unaffected during the world trade depression when all other industries suffered considerably. Jute goods and Pig Iron were the only large scale Industries which were adversely affected.
Other protected industries not only maintained but, in several cases, recorded substantial gains so that the total output, after an initial set back in 1930, was continuously rising between 1930-38.
The Policy brought about a tremendous expansion of protected industries. During the 17 years, 1923-39, the production of steel Ingots expanded 8 fold; of cotton piece goods by 2½ times; the output of matches and paper rose by 38% and 180% respectively; and cane sugar recorded the maximum advance of a little less than 39 times from 24000 tons in 1922 to 9,31,000 tons in 1938.
Another important way in which protective tariffs tended to help Indian economy indirectly was the establishment of industries dependent on Iron and steel, Paper and cotton textiles. A number of small industries developed due to the availability of steel and steel products manufactured in India and the existence of industries like paper, cotton textiles which provided a market for their products.
As a natural consequence of the establishment of new industries and expansion of the old, there was a steady increase in employment in the country. According to Dr. Bal Krishna, total employment in the group of protected industries was about 580,000 in the year 1923 but it increased to about 881,000 by 1937.
In other words, there was an increase of 46.8% in employment among the protected industries by 1937. During the same period, the increase in the unprotected group of industries was only 23.6%.
The expansion of the indigenous cotton textile industry was an advantage to cultivators of cotton as it stimulated the production of high priced medium-staple cotton. The gains of the cultivator in the case of sugar-cane were even more substantial.
From 26 lakh acres in 1930-31, the year when protection was first granted to the Sugar industry, the area under sugar cane increased to 36 lakh acres; area under improved varieties increased from 1 million to 2.6 million acres; the Yield per acre improved from 12 to 14 tons.
To sum-up the policy of Discriminating Protection “within its limited scope — achieved a fairly large measure of success and on balance the direct and indirect advantages of protection —offset the burden on the consumers.”
6. Fiscal Policy during World War II:
The Second World War, once again, exposed the weaknesses of India’s industrial structure. It was realised that India lacked many vital industries so necessary for the prosecution of the war.
At the same time, the Indian industrialists wanted to take advantage of the indirect protection provided by the war (all imports were practically cut off) and set up new industries. But there was fear of foreign competition once the war ended.
It was to allay these fears that the government gave the assurance in 1940 that the case of the ‘war’ industries would be sympathetically considered for the grant of protection to withstand unfair competition. The Reconstruction Committee also made it clear that it would be in the interests of the country to continue the policy of protection by liberalizing the Principles governing the selection of industries.
The idea was further reinforced by the industrial Policy statement (1945) which made a distinction between the formulation of the future policy of the country and an investigation of the claims of industries started during the war period.
In order to honour the commitment made and pending the formulation of a long-term policy, the government appointed an interim Tariff Board, as a short-term measure, to enquire into the claims of industries started during the war.
At the same time, there was a relaxation of the conditions governing the grant of protection.
The Triple Formula was discarded and in its place, the tariff Board laid down only two conditions:
(1) That the industry was “an established one and conducted on sound business lines.”
(2) That “having regard to the natural or economic advantages enjoyed by the industry and its actual or probable costs, it was likely, within a reasonable period of time, to develop sufficiently to be able to carry on successfully without protection or State assistance,” or that “it was an industry to which it was desirable in national interest to grant protection and that the probable cost of protection or assistance to the community was not excessive.”
As can be seen, the conditions laid down in 1945 were more ‘liberal’ and hence an improvement on the conditions under which the pre-war Tariff Boards worked. The most important change was the decision to allow the Board to recommend protection or assistance to those industries which it considered to be of national interest.
And the term ‘national interest’ was not confined exclusively to military and defence considerations but meant the economic welfare of the country, diversification of national economy and provision of avenues of industrial development.
Another departure was the emphasis placed on the actual or probable cost of the industry based on its economic advantages. In other words, even if some of the raw materials were not available in the country, the industry was entitled to protection on the strength of its other economic advantages.
Further, the Board was specifically asked to recommend what additional or alternative measures could be adopted to assist the industries. Realising the changed circumstances, the Board gave a liberal interpretation to the term of reference.
And yet, the new conditions were not without criticism. The requirement that an industry must be established before it could qualify for protection or assistance was a handicap specially in regard to the establishment of heavy or technically complicated industries.
Likewise, the condition about an industry being conducted on “Sound business lines” was vague or uncertain in as much as no criteria of soundness could be laid down, and it was not always easy for an industry to meet this condition, particularly if the standard was to be the average level of efficiency of the competitive industry abroad. The Fiscal Commission (1949) found this criticism sound.
The Tariff Board set up in 1945 was reconstituted in 1947 for a period of three years. The new Board was authorised to investigate the claims of war industries for a period of three years as an interim measure pending the formulation of a long term policy.
One feature worth noticing was the expeditious manner in which the Interim Board conducted its enquiries. During a period of 5 years, it conducted 90 enquiries as against 51 conducted by the pre-war boards between 1923-39. Of these, 5 related to the fixation of internal prices, 46 were new cases and the remaining 39 related to the continuance or modification of protection already given.
The Board recommended protection, for the first time, to 38 industries and continuance of protection to 22 industries. A few of the important industries which received protection during this period were:
Aluminium, Antimony and other non-ferrous metals, caustic soda and Bleaching Powder, Soda Ash, Textile Machinery, Bicycles, electric Motors up to 30 H.P., Sewing machines, Sheet Glass and Batteries for motor vehicles.
Some of the prewar industries to which continuance of protection was not recommended were cotton textiles, Iron and steel, paper, silver thread and Wire, Magnesium Chloride and sugar. These industries, in the Commission’s view, had already stabilized or had no serious competition to face.
Thus, the tenure of the Interim Board was event-full in certain respects. It functioned under a mixture of influences such as scarcity of commodities, adverse trade balances, direct methods of control and fears of nationalisation. It acquitted itself fairly well and did what was expected of it. But a redefinition of the fundamentals of the policy of protection was long over due.
While far-reaching changes had taken place in national and inter-national economic outlook, the old notions of tariff protection continued to influence policy. Consequently, the government announced the appointment of a new Fiscal Commission.
The new commission was asked to examine the working of the policy of Protection since 1922 and to recommend “the future policy which the government should adopt in regard to protection to and assistance of industries, and the treatment and obligations of the industries which may be protected or assisted and also the machinery required to implement such policy.”
7. The Second Fiscal Commission, 1949-50:
The Commission rejected the old concept of protection wherein it was viewed as a method of protecting individual industries; Instead, it was accepted as a means to an end —as one of the instruments of policy which the state must employ to further the economic development of the country.
In the commission’s view, the protection of industries should be related to an over all plan of economic development so as to avoid unequal distribution of burdens and an uncoordinated growth of industries.
For the purpose of granting protection, the commission classified industries into three groups:
(1) Defence and other strategic industries —they were to be established and maintained what ever the cost.
(2) Basic and Key industries —in their case, the Tariff commission was to decide the form and quantum of protection.
(3) In the case of ‘other industries’, the commission recommended that “having regard to the economic advantages enjoyed by the industry or available to it and its actual or probable cost of production, it is likely within a reasonable time to develop sufficiently to be able to carry on successfully without protection or assistance and/or it is an industry to which it is desirable in the national interest to grant protection or assistance and having regard to the direct and indirect advantages, the probable cost of such protection or assistance to the community is not excessive.”
In addition to defining the conditions governing the grant of protection, the commission gave its opinion on certain specific issues. Firstly, it held that local availability of raw materials was not to be a condition for the grant of protection if the industry possessed other economic advantages such as internal market and availability of labour etc.
Secondly, in determining the comparative advantages possessed by an industry, not only its home market but any possible export market was also to be taken into consideration.
Thirdly, the Commission recommended that ability to satisfy the entire needs of the Home market was not to be regarded as a condition for the grant of protection.
It was enough if the industry was able to “cover a sizeable portion of the internal market within a reasonable period of time.”
Fourthly, in so far as an industry used the products of the protected industry as raw material, the commission recommended the grant of “compensatory protection.”
Fifthly, the Commission held that industries requiring heavy capital outlay or high degree of specialisation in personnel and plant equipment and subject to severe foreign competition should be assured of protection before their actual establishment.
Finally, the commission recommended the grant of protection to agricultural commodities subject to the limitation that the number of such commodities was small and that they were selected on the basis of their relative importance and the volume of employment they offered.
As regards the methods, the commission examined the suitability of import duties, subsidies, quantitative restrictions, and administrative measures. It accepted the fact that the main reliance had to be placed on the method of import duties. In its view, the method of quantitative restrictions should be used sparingly for temporary periods against abnormal imports.
It found subsidies desirable, and, for this purpose, recommended, the creation of “Development Fund” out of the revenues collected from protective tariffs. The commission felt that the creation of this fund would enable a consistent and continuing policy to be persued from year to year.
A new feature of the recommendations of Fiscal Commission was the insistence on the fulfillment of certain obligations by the protected industries. In the commission’s view, protection can’t be demanded as a matter of right; it is a privilege, a concession which carries the obligation of maintaining the highest level of efficiency so that the burden on the community is reduced to the minimum.
The commission charged the protected industry with the obligations of:
(1) Maintaining a reasonable price policy;
(2) Progressively increasing its scale of production;
(3) Attaining and maintaining the quality of its products in accordance with suitable standard specifications;
(4) Employing up to date methods and practices in production and distribution;
(5) Organising research, training apprentices and providing opportunities for practical training to technical students.
The commission laid down that it should be the duty of the tariff commission to review the progress of the protected industries from time to time to ensure that they carried out their obligations.
As regards the machinery for the grant of protection, the commission recommended the appointment of a Tariff commission, a permanent statutory body, consisting of live members including the Chairman.
The commission was broadly charged with the function of:
(1) Enquiring into claims for initial protection;
(2) Examining the case for the continuation of protection,
(3) Periodically reviewing the working of protection, particularly with reference to production, costs and prices of protected industries:
(4) Undertaking price fixation enquiries for commodities;
(5) And advising the govt. on matter relating to imposition of anti-dumping duties and retaliatory measures and negotiation of trade agreements and tariff concessions.
ln-order to enable the commission to carry out its duties easily and efficiently, it was empowered to summon witnesses and compel them to render essential evidence.
8. Critical Appraisal of the Indian Fiscal Policy:
The Report of the Commission undoubtedly marks a landmark in the development of economic policy in India. The most outstanding feature of the work of the commission was its comprehensive outlook. Instead of concentrating attention on particular industries, the commission viewed protection in the light of the overall needs of the country as a whole.
Another merit lay in the awareness shown by the commission that tariff protection is not the only method of promoting economic development. That is why it laid stress on other supplementary measures. A more praiseworthy feature was its emphasis on the fact that the grant of protection does not absolve the state of its responsibility.
It recommended sufficient after-care of protected industries. The obligations imposed on the protected industries was another novel and welcome feature. The commission cut new ground in recommending protection to agriculture and embryonic industries. Furthermore, the conferment of statutory powers on the Tariff commission removed a serious lacuna of the old scheme.
Although the commission thus made some significant departures from old policy, yet its findings can’t be regarded as free from criticism. For instance, the first of the two conditions laid down for the grant of protection to “other industries” contained the essence of the Triple Formula which, if interpreted as rigidly as the policy of Discriminating protection, would lead to almost the same results.
Another flaw was that the commission based its recommendations on the finality of the Directive Principles and the Industrial Policy statement, 1948. They were supposed to be unchangeable whereas the industrial policy was modified in 1956.
The commission’s unscientific approach in making an industry automatically eligible for protection if included in the economic plan of the country not only affected the efficiency of the industry but also rendered the authority of the commission ineffective and superfluous.
It is also well to remember that all industries included in the plan did not need protection and those in need could be helped by means other than protection. Tariff policy was, no doubt, made more liberal but its ultimate end was not envisaged. Protection can not and should not be allowed to continue indefinitely.
Finally, considering the obligations imposed on the protected industry, the commission failed to analyse what would happen to the economic plan of the country if particular industries lost protection for non-compliance with obligations imposed.
The government accepted the recommendations of the Fiscal Commission and set up a Tariff commission in 1952. Between January 1952 and March 1966, the Tariff commission conducted 168 enquiries in all. These included 17 inquiries into industries seeking protection for the first time, 144 inquiries of industries seeking continuance of protection and 7 review inquiries relating to protected industries.
Among the industries enjoying protection were metallurgical industries like Aluminium, Engineering industries, Bicycles, Electric transformers, Automobiles, Ball-bearing, Piston-Assembly etc., Chemicals and allied industries like Caustic soda, Soda Ash, Sheet Glass, Plastic Buttons, Dyestuffs, Calcium Carbide, Calcium Lactate etc.
The only major consumer industry enjoying protection till 1963 was the match industry where a foreign concern reaped the major benefit. The industries which ceased to enjoy protection included Calcium Lactate, Engineer’s Steel Files, Bicycle, Machine Screw and Grinding Wheels, Sewing Machines, Pencils, Preserved fruits, etc.
The Tariff commission thus played a useful role in the industrial development of India. A few protected industries like Aluminium, electric motors, power and distribution transformers, ball-bearings, bicycles and Calcium Carbide exceeded the Plan targets.
However, by recommending governmental help, which also involved expenditure of public funds, to inessential industries like artificial Silk and cotton, plastic and rayon, the Tariff commission was responsible for diverting scarce resources which could have been otherwise utilised for urgent and essential requirements like food, housing and health.
9. Imperial Preference of the Indian Fiscal Policy:
Imperial Preference implied the policy of preferential trade between the U.K. and her dominations. It was advocated as a means of preserving Imperial unity and of consolidating the British Empire both politically and economically.
The aim was sought to be realised by imposing lower custom duties on goods from the Empire Countries as against the relatively higher duties on goods from the non-empire countries. Although the question of Imperial Preference in the British Empire first took practical shape in 1897, India’s participation in such a scheme was rooted only in 1903.
Lord Curzon’s Government turned down the proposal on the grounds:
(a) That 1/4 of India’s total imports came from non-empire countries and these were of a kind which the British Empire either did not produce or was not in a favourable position to supply;
(b) That India was dependent on her trade with foreign countries for the discharge of her international obligation;
(c) That the government would loose a large portion of the revenue it received from British and colonial imports;
(d) That she might be forced to shape her policy not in accordance with her needs but according to the interests and demand of the empire.
In view of the above, Lord Curzon concluded that from the economic standpoints, India had something, but not perhaps very much, to offer to the Empire, that she had very little to gain in return, and that she had a great deal to loose or risk.
The First World War revived the idea of pooling the resources of the Empire and turning it into one well-knit economic unit. The deliberations of the Imperial WAR Conference of 1917 led to a reversal of policy in U.K. which now granted, on a unilateral basis, substantial preference to the members of the Empire.
This led to a re-examination of this question in India where the Fiscal commission (1921-22) re-surveyed the issue.
The commission found that Indian exports were not of a kind that could materially benefit from any scheme of preferences because “the economic advantage derived from a preference tends to be more important in the case of manufactured goods than in the case of raw-materials.”
In their view, the only preferences of interest to India were those on tea, coffee and tobacco. Even in their case, the advantage was not substantial.
In the case of tea India’s main competitor, Ceylon, enjoyed equal preference. Indian trade in coffee was small and there was not any large scope for increased production in India. So far as tobacco was concerned, even with preference it remained at a disadvantage in the English market because duty on tobacco was levied by weight and not by value.
Even otherwise, preference to tea or coffee or jute was of little national value to India because, as Professor Vakil points out, it was “no use obtaining concessions for a foreign Industry established in India in return for concessions in our market to the goods of another country.”
On the other hand, the commission admitted that India could not grant extensive preferences to the U.K. “without imposing a serious burden on herself” because the British exports were clearly competitive so far as Indian products were concerned.
In-spite of these overwhelming arguments, the commission amazingly supported Imperial Preference as a practical policy. The reason is not far to seek.
English manufacturers had beseeched the commission to recommend Imperial Preference and, Swayed by the paramount British Imperial interests, the commission advised the Indians to regard these concessions “as a voluntary gift and not as part of a bargain” so as to strengthen “the ties which bind together the scattered units of the Empire.”
The minority of the Fiscal commission, on the other hand, drew attention to the fact that the principle of Imperial Preference implied uncontrolled powers of initiating, granting varying and withdrawing preference from time to time consistently with each country’s interest and on lines which were not injurious to itself.
They, therefore, concluded that India must “possess the same supreme powers as were enjoyed by the Dominions before Imperial Preference could become for her a matter of practical politics.”
Ignoring the Minority’s view, the commission recommended the adoption of a selective and discriminatory preference provided:
(a) That no preference was granted on any articles without the approval of the Indian legislature;
(b) That preference did not, in any way, diminish the protection required by Indian industries;
(c) And that it did not involve any appreciable economic loss to India on balance.
Accordingly, a scheme of partial and limited preferences was put into operation during the period 1923-34 when two schemes of “preferences within protection”, one relating to Iron and Steel and another relating to cotton textiles, were introduced.
The onset of the Economic Depression in 1929 brought about a sea-change in the economic situation of the world. The development of Japan, U.S.A. and Germany as well as the aggressive economic nationalism of the period, posed a great threat to the prosperity of England and she was forced to abandon Free-trade and adopt protectionism.
It was this turn in the economic condition of England which provided the chief motive force for the Government of India’s subsequent change of policy, rather “than any desire to rehabilitate India’s declining foreign trade.”
England, India’s largest single customer as well as her chief competitor, offered her a straight choice between being included in the system of inter-imperial preferences or being left “to herself at a time of declining trade, increasing restrictions and shrinking markets.” Thus faced, it was no longer a question of what India stood to gain but of what she stood to loose by standing outside it.
The Government of India, haunted by the fear of an imminent loss of Empire markets, hastened to improvise a scheme of preferences as an insurance against any possible loss. The U.K. was an important market for Indian exports and refusal to participate in the scheme would have involved the loss of this valuable market.
Besides, currency and exchange rates in the Sterling area were expected to be more stable than in other countries where policies were changing rapidly. In addition, England had also been forced to grant reciprocal preferences.
These considerations induced the Indian Delegation to the Imperial Economic Conference at Ottawa to enter into an elaborate scheme of reciprocal preferences with the U.K. government and other Common Wealth countries.
Under the Ottawa Agreement, India granted preference on 106 items while she received preferential treatment in respect of 40 commodities of which tea, rice, tobacco and jute were the most important. The Agreement, which was to remain in force for three years, was signed on the 20th August, 1932 and was ratified by the Indian Legislative Assembly in November, 1932.
Thus were protected British exports to India against foreign competition although, in the process, the Indian industrialist was thrown at the mercy of the British manufacturer, the biggest monopolist of the Indian market. This, in effect, meant the negation of the policy of discriminating protection.
Further more, Imperial Preference failed to achieve even the limited objective of maintaining India’s exports to the U.K. Reviewing the working of the policy during 1938-39 to 1948-49, the Indian Fiscal Commission, 1949-50, found that India’s share of the export market in preferred articles in the U.K. fell down while U.K.’s share in the Indian market is preferred articles remained stationary.
We may conclude with Ganguly that the policy of Imperial Preference had at least a negative value for the U.K. in so far as it prevented a decline in her exports of hardware, chemicals, non ferrous metals, appliances and apparatus, cycles and paints in which European competition was very severe.
Whether Imperial Preference had a similar negative value for India also is doubtful in view of the fact that the possibilities of a compensatory expansion of demand for Indian exports in countries other than U.K. were not so restricted as was supposed at the time.