The Public Debt of India


The public debt of India and India's foreign indebtedness should not be mixed up. Public or national debt of India means the aggregate of debts contracted by the Central and Provincial Governments in India and local authorities like Municipal Corporations, Port Trusts, or Improvement Trusts. Private investments of foreign capital in India are not part of her public debt. There is no official estimate of such private investments and they are believed by competent authorities to be somewhere between £ 600 and £ 700 millions or roughly Rs. 800 or 900 crores. The public debt, that is, the interest-bearing obligations of the Government (Central, Provincial and Local authorities) is a definitely ascertained sum. It, of course, varies from year to year, but it has been growing steadily. In ascertaining the total public debt of India on any date, certain considerations are to be borne in mind. The public debts of Indian States are not yet ascertained. There is no regular public debt system in the Indian States worth mentioning. Recently, Mysore floated loans to the extent of Rs. 3 crores. There are a few instances in which the Government of India have made advances to Indian States. Again, the Provincial Governments have independent borrowing power, but they do it mostly through the Central Government, who still finance them largely. The Provincial Governments, in their turn, finance the Local Bodies in their areas. The debt figures, therefore, overlap to a certain extent. In the published estimates of public debts of India, the independent borrowings of large local bodies like Presidency Town Corporations, Port Trusts, City Improvement Trusts and the like, are sometimes omitted. We may, therefore, confine our attention to the debt of the Central and the Provincial Governments.


The following statement will show the position of such debt from 31st March 1914 to 31st March 1931 (the sterling obligations contracted in England are converted into rupees at 1sh. 6d.): -

Year Crores of Rupees

1914 510.19

1918 693.91

1922 832.48

1923 881.74

1924 919.00

1925 970.02

1926 996.36

1927 1,006.19

1928 1,026.37

1929 1,074.46

1930 1,136.48

1931 1,171.96

In order to understand the nature of this debt, that is to say the character of the interest-bearing obligations of the Government, it is necessary to analyse the composition of the figures quoted above. The details of the interest-bearing obligations of the Government of India on 31st March 1914 and on 31st March 1931 may be exhibited.

ON 31st MARCH 1914

FUNDED IN INDIA Crores of Rupees

Loans 145.69

Treasury Bills with public ---

Treasury Bills in P. C. Reserve ---



Viz: "Other Obligations"

P. O. Savings Banks 23.17

P. O. Cash Certificates ---

Provident Funds etc. 10.93

Depreciation and Reserve Funds. ---

Provincial Balances ---

Total 179.79

IN ENGLAND Millions of Pounds

Sterling loans 177.10

War contributions ---

Railway annuities 70.60

India Bills ---

Provident Funds etc. ---

Total in England in pounds £ 247.70

Total in Rupees at Ish. 6d. to the rupee 330.40

Total interest bearing obligations,

in crores of rupees, on 31-3-1914 510.19

ON 31st MARCH 1931

FUNDED IN INDIA Crores of Rupees

Loans 417.85

Treasury Bills with public 55.39

Treasury Bills in P. C. Reserve 5.89

479 12


Viz: "Other Obligations"

P. O. Savings Banks 37.08

P. O. Cash Certificates 38.44

Provident Funds etc. 70.33

Depreciation and Reserve Funds 23.87

Provincial Balances 6.11

Total 654.95

IN ENGLAND Millions of Pounds

Sterling loans 315.97

War contributions 16.72

Capital value of liabilities undergoing

redemption by way of terminable

Railway annuities. 50.32

Imperial Bank of India Loans 4.05

Provident Funds etc. 0.70

Total in England in pounds £387.76

Total in. Rupees at 1 sh. 6d. to the rupee 517.01

Total interest-bearing obligations,

in crores of rupees, on 31-3-1931 1,171.96

What do the figures show? The public debt of India, which was a little over 510 crores of rupees in 1914, rose to nearly 1,172 crores in 1931; in other words, it has more than doubled itself. The public debt is partly borrowed in India in rupees and partly in England in sterling. There has been an increase in both sections of the debt. But, the increase in Indian borrowings has been larger than that in foreign borrowings. The rupee debt, which was 179 and odd crores in 1914, has become nearly 654 crores in 1931. It means that the Indian money-market has contributed more to the Government borrowings than the British money-market during these years. These figures also show that the resources other than the funded rupee loans, that is, receipts from postal savings banks, cash certificates, provident funds etc., were comparatively small before the War (1914), while they contributed substantial sums to Government's capital expenditure during the War and after. The unfunded, that is, other obligations in 1914 were only Rs. 34 crores, while they were Rs.180 crores in 1931. When these rupee borrowings are further analysed and the details of the various kinds of securities, on which loans were raised by the Government, are set out, it would appear that the short-term loans of the Government have been more popular than the long-term loans. No long-term loans were floated during some years, and in years when both long and short-term loans were floated, the short-term loans yielded larger volume of money. In order to make long-term loans popular, it was necessary to have recourse to devices like making them income-tax-free and giving facilities for conversions. Short-term borrowing on a larger scale is a post-war feature of public finance and has now become a normal feature of the Government's borrowing policy. The Treasury Bill, as an instrument of short-term public credit, is a post-war development. The figures further show that, though not in the same proportion as the rupee debt in India, there has been also an appreciable rise in the sterling debt contracted in England. It was £ 177 and odd millions in 1914. In 1931 it has gone up to £ 316 millions. The figures relating to this sterling debt, in its equivalent rupees in published literature, sometimes appear to be discrepant. The discrepancy is due to the different rates of conversion. Since 1921, the Government of India have been keeping their accounts on a rupee basis, and since 1925, the conversion rate has been 1 sh. 6d. Before the War, it was 1sh. 4d. This rise in the exchange value of the rupee from 1sh. 4d. to 1sh. 6d. has naturally had the effect of bringing down the figure of the principal (equivalent in rupees) of the sterling debt and also of decreasing the interest charges in terms of rupees. For example, the total of the sterling obligation of £ 247.70 millions in 1914, converted into rupees at 1sh, 4d, was Rs. 371 crores and 55 lakhs. The same sum converted at 1 sh. 6d. was shown in the, figures quoted above as Rs. 330 crores and 40 lakhs, a decrease of over Rs. 41 crores as a result of the rise in the rupee exchange. So the pre-war sterling obligations were thus reduced by 41 crores by the exchange. To this extent, the finances of the Government have gained in terms of rupees. It does not, of course, mean that the actual burden of that debt on India has diminished, for it is discharged ultimately in the form of goods and services.

Before we proceed to examine the origin and the growth of this debt and its reactions on the public finance and economic progress of India, it is necessary to state that, as against these interest-bearing obligations, the Government hold certain interest yielding assets. There has been a steady rise in these assets also, as the following figures show:-


Year Crores of Rupees

1914 524.71 These three figures

1918 551.54 are calculated at

1922 616.53 1 sh. 4d to the rupee

1923 633.04

1924 663.58

1925 716.64,

1926 749.82 These figures

1927 786.90 are calculated

1928 829.45 1 sh. 6d to the rupee.

1929 875.51

1930 913.74

1931 937.44

Besides these interest-yielding assets, the Government also hold some cash, bullion, and securities held on Treasury accounts, ranging roughly between 40 and 50 crores of rupees. To ascertain the nature of these assets a little more fully, it is necessary to analyse their composition in 1914 and in 1931, as we did in the case of the interest-bearing obligations.

These assets as on 31st March 1914 and as on 31st March 1931 were as follows: -

On 31st March 1914 On 31st March 1931

(In Crores of Rupees)

At 1 sh. 4 d. At 1 sh. 6 d.

1. Capital advanced to Railways 438.63 445.29

2. Capital advanced to other Commercial

Departments, like Posts and Telegraphs 14.08 23.41

3. Capital advanced to Provinces 71.99 149.14

4. Capital advanced to Indian States and

other interest-bearing loans -- 19.45

Total 524.71 937.44

Cash, Bullion & Securities held on

Treasury accounts -- 46.78

Total 524.71 984.22


What do the figures show? They show that out of the total debt of Rs. 1,172 crores, a substantial portion, namely, Rs. 937 and odd crores, is invested in productive assets earning revenue, such as Railways, Posts and Telegraphs, Loans to Provincial Governments, Indian States and the like. Between 1914 and 1931 the capital advanced on Railways increased by about Rs. 320 crores. The loans to Provincial Governments also have increased in the same period from nearly 72 crores to 149 and odd crores. These figures further show that there has been all through this period some tangible public debt not covered by productive assets, that is to say, a portion of the debt is "Ordinary" or "Unproductive."

The following figures will give an idea of the position of the unproductive debt before the War in 1914 and after the War up to 31st March 1931: -

Debt not covered by productive assets on 31st March.

Year Crores of Rupees

19141 26.580

19181 194.7

19221 216.47

1923 203.90

1924 204.98

1925 196.03

1926 194.58

1927 181.81

1928 172.66

1929 170.11

1930 176.38

1931 199.34

1 For these three years the conversion rate is 1 sh. 4d. For the other figures it is 1 sh. 6d.

These figures show that the unproductive debt before the War, which was about Rupees 26 crores, has risen to about Rs. 200 crores after the War. This is accounted for by the post-war budget deficits of about Rs. 100 crores and the War contribution of 100 million pounds to England. In the productive assets, there are certain items like the cost of construction of New Delhi and Bombay development. Some of the advances to Commercial Departments, Provincial Governments and Indian States are said not to yield sufficient revenue to pay the interest charges on the amount covered by those advances. However, even deducting 30 or 40 crores on such heads, the fact remains that about 80 per cent of the interest-bearing obligations are covered by real productive assets.

The prima facie impression produced by the above analysis of the figures is that the public debt position of India today is on the whole quite satisfactory. 5/6th of the interest-bearing obligations of the country are covered by productive, that is, interest-yielding assets. The provincial loans include capital expenditure on irrigation works, which are productive in a real sense. The distribution statement of the public debt, no doubt, does not imply that any part of the debt is "specially charged or connected with any particular assets" except, Railway annuities. It may also be true that a portion of the current revenues of the country were invested on some of the productive assets, chiefly Railways, and that, in the past, much unproductive debt was also paid out of the revenues of the country, to the disadvantage of the tax-payers of India. It is also true that much of that unproductive debt, which was paid up from the taxes, was incurred on expeditions beyond the frontiers and to meet budget deficits arising from warlike preparations, high military expenditure, famine relief and the like. As already stated, the present unproductive debt of Rs. 200 crores mainly attributable to the budget deficits of about Rs. 100 crores and the War contribution of £ 100 millions. Notwithstanding these justifiable comments, the position of the public debt, as it stands today, must be admitted to be not unsatisfactory, apart from its origin and ancient history. The Report of, the Congress Special Committee also admits that, of the total value of productive assets Rs. 915 crores, in round figures as on 31st March 1930, a sum of Rs. 850 crores "can be taken to be really productive in the sense of yielding both interest and surplus sufficient to provide for capital redemption of the debt." (Vide page 19 of the Report).

According to the modern theory of public finance, public debt supposed to be contracted ordinarily for the creation of productive assets and to develop the material resources of the country. Democratic Governments are credited with the desire to utilise public credit for objects which will promote national prosperity and improve the economic efficiency of the people. How far this ideal is pursued in practice is a different matter. The example the leading self-governing countries of Europe discloses the fact that even their so-called popular Governments had to burden their countries with huge deadweight loads of public debts, sunk on armaments, preparation for wars, conduct of wars and obligations which resulted from wars. The men placed at the helm of affairs of those self-governing countries naturally plead that expenditure on armaments and defences is essential to ensure the economic development of the country by protecting it from the danger of external aggression. Where wars result in accession or territories or acquisition of valuable property rights in oil-wells, gold mines and the like, the debt incurred on such wars is accepted by the people as legitimate. Part of the war costs in the case of victorious countries is recouped by tributes and indemnity obligations from the defeated countries. When war is forced upon a country by its aggressive neighbour, the defence of the country against such attack and the preservation of its political independence makes the contraction of public debt inevitable. The justification for any item of public debt in each case, is ‘a question of fact,’ as the lawyers put it, and must be judged on its merits. So, it is n necessary to complicate the examination of the public debt position of India by an incursion into the ethics of War and Defence in the abstract.

The prima facie conclusion that the present position of the public debt of India is on the whole satisfactory does not, however dispose of the problem of the public debt of India in its entirety. There are certain definite problems bearing on the public debt question, which require careful and impartial examination, before India can be justly saddled with the entire burden of her public debt. Firstly, whether the public debt of India was contracted on reasonable terms which are advantageous to India, whether due precautions were taken to desist from avoidable foreign borrowing, and whether sound and adequate measures were adopted for avoidance or reduction of the debt, specially the unproductive part of it, are questions which must be answered, before we pronounce that the position is really satisfactory. Secondly, comes the question of the origin and the subsequent history of the public debt of India, which is a little complicated by the two-fold character of the East India Company as a Trading Corporation and as a Sovereign Power and the mixing up of its commercial and territorial accounts in the early days. Thirdly, arises the question of such apportionment of the financial obligations between Great Britain and India in the matter of India's public debt. The necessity for the apportionment arises from the fact that, in theory as well as in practice, the Government of India has been a department of the British Government, the policy of Indian administration having been, in the main, determined by the British Ministers. The Indian public debt has really been incurred by the Government of Great Britain. Writing on this subject several years ago, Sir George Wingate, in his book on "Our Financial Relations with India," rightly said: "Good faith and justice alike hold Great Britain accountable for the obligations incurred by the Indian Government, just the same as the obligations contracted by the Imperial Government." It is with these three aspects of the problem that I propose to deal.


The manner in which the Government of India utilised the money-markets in India and England may now be examined. In dealing with the Government's borrowing policy we need not enter into a consideration of such fundamental questions as whether the State should find the capital expenditure to be invested on communications, irrigation, hydro-electric schemes and the like, instead of leaving it to private enterprise; and whether it is more advantageous to borrow in the country or outside, if the State has to borrow for capital expenditure. Both these questions may now be treated as being outside the range of controversy. The State has come to be looked upon in India as the chief agency for the development of the country by undertaking direct expenditure upon these public works and utility services. It is also accepted as a sound financial proposition that it is more advantageous to borrow in the Country, to the extent possible, by mobilising the savings of the Indian people. Sir Basil Blackett, speaking in the Legislative Assembly in 1925, said that the large amount of external debt which India then owed (£ 341 millions=455 crores at Rs. 15 per pound) involved "a drain on India's production of goods and services in the future, up to the value of the principal, together with the future further drain of these goods and services for interest during the interval, until principal is paid for." The present Finance Member has also endorsed this view as being generally correct. As a general proposition in public finance, it may be taken for granted that external debt ought not to be resorted to except in so far as the requisite capital is not available internally. Mr. E. D. Friedman, author of "International Finance and its Organisation," says: "A foreign debt requires annual interest payments, which may be effected by an exportation of goods, and to that extent, the debt represents a diminution of the real wealth of a country; but an internal debt is a paper debt; it does not diminish the wealth of the nation as a whole."1 It will, therefore, be necessary to see whether the Government of India could have met their capital requirements from Indian resources; in other words, whether it was absolutely necessary for them to have borrowed in the London Market, thereby exposing India to the disadvantages of foreign debt set out above.


The answer to the question whether the capital resources of the country will be found equal to the capital requirements of the Government depends upon several factors, some of which are not easily ascertainable. The requirements of the Government vary from time to time, even eliminating abnormal demands resulting from wars and other unforeseen causes. The Government's programme in respect of fresh borrowing, conversion of maturities, provision for gradual reduction of sterling debt and for annual payments for purchase of Railways, is not definitely ascertainable for the future. But, during the next few years to come, the annual capital expenditure of the Central Government, the Provinces and Local Bodies is computed to be somewhere in the neighbourhood Rs. 60 crores, by some who claim to possess the data. On the basis of the average for the last decade or so, it is expected that the Indian money-market will yield annually about Rs. 20 crores. The Railway reserves and debt redemption scheme will yield about 10 or 12 crores yearly. So, if the Government, is to rely solely for their requirements on India, an additional sum of about Rs. 30 crores must also be found in India to make up the estimated annual expenditure of Rs. 60 crores. Whether it can be found or not is difficult to say. It is indisputable that banking development, with a strong Central Bank at one end and a network of joint-stock banks with branches spread all over the country at the other, and with the establishment of other mobilising institutions, there will be much larger facilities for the collection of the savings of the people and diverting them into productive channels. It is also true that, with strenuous effort on the part of the Government and with the co-operation of the Presidency Banks, and later, of the Imperial Bank, it was found possible to raise unprecedentedly large loans in the closing years of the War and in the years that immediately followed it. Including the proceeds of the postal section, Rs. 39 crores were raised in 1917-18, Rs. 57 crores in 1918-19, Rs. 49 crores in 1921-22 and Rs. 47 crores in 1922-23. But the conditions under which such success in borrowing was achieved, should not be lost sight of. The necessity of the Government during that period to explore the potentialities of the Indian market was great, as they had no access to the London market during the War, and for 2 or 3 years after its close. So, exceptional facilities and very attractive terms were offered to investors in the shape of high rates of interest, exemption of some issues from income-tax, discount on long-term issues, redemption premium on short-term securities and the like. The Banks also offered accommodation to intending investors to buy the securities. Above all, it must not be forgotten that people had at that time more savings to invest than at any time before, as a result of the war-time gains, the high prices of agricultural produce that ruled in those years and consequent favourable balances of trade.

Even assuming that recourse can be had to terms calculated to tempt investors in future also, whenever the Government feels the necessity to get money at any cost, it is certain that the trading and industrial interests of India will not acquiesce in such a borrowing policy of the Government. It must be conceded that in their attempt to find money for their capital expenditure, the Government should not dry up the sources of supply of capital for trade, industry and agriculture. Such tempting loans will also depreciate the bonds bearing lesser interest, to the detriment of the old investors. My esteemed friend, Sir Maneckjee Dadahboy, who is generally a supporter of the policies of the Government, sometimes complained in the Council of State against the Government, in regard to the high rates they offered on their loans. Speaking of the 6.5 per cent Bombay Development Loan, he once said that, "It temporarily ruined Bombay because merchants and other people withdrew all their money from the joint-stock companies and banks where it was deposited, and invested and employed it in the purchase of the 6.5 per cent Development Loan, with the result that there was no money left at a critical time for the purpose of carrying on the trade of Bombay." I have heard the same view expressed by other prominent businessmen in regard to the repurcussions of the tempting rates offered by the Government on private enterprise in this country in the field of trade and industries. So, it is difficult to hazard an opinion on the question whether the yield in the closing years of the War and those that immediately followed it, can be taken as a reliable index of the future potentiality of the Indian market to supply the entire capital needs of the Government, without starving trade and industries.

There are some in this country who hold that India has large hoards of gold and silver which may be tapped. We come across very extravagant statements in this connection now and then. Recent calculations, however, show that 30 per cent of the aggregate gold output was eaten up by Europe and America for non-monetary purposes, while India, with 1/5 of the population of the world, absorbed no more than 14 per cent, that is, 6 per cent less than its due share on population basis. What, after all, is the result of the distribution of this 14 per cent of the total output of the precious metal among the people of India? The average Indian household is credited with possession of no more than Rs. 100 worth of gold and silver ornaments. These are mostly worn by the women folk, according to social customs, on their bodies which are their banks. Gold and silver consumed for industrial uses, lost by wear and tear, and exported across the borders to Tibet, Persia and Afghanistan, must be set off against the imports. I am satisfied, after a careful examination of the question, that the theory of the existence of large gold and silver hoards buried in the ground or hidden in the houses is baseless. The Princes may have some gold and a few middle-class families may have some sovereigns. But, they cannot be transformed into bankable assets. The proposal frequently made by the Editors of the "Indian Finance" for the issue of gold certificates will not, in my opinion, bear fruit and bring out appreciable hoards of gold, for the simple reason that they do not exist.

If all the capital required by the Government as well as trade and industries be not forthcoming through the Indian market, from the savings of the people of the country, the problem whether it is more advantageous to the country to let the Government borrow elsewhere (more cheaply than traders and industrialists can be expected to do), leaving more internal capital to be absorbed by trade and industries, or to let the Government derive all its capital requirements from savings in the country, making import of external capital for trade and industries inevitable, is one with which the future responsible Indian Minister is sure to be faced. The difficulties of the Indian Government in the matter of finding their capital are not such as will disappear, the moment power is transferred from the hands of a British Finance Member to those of an Indian Finance Minister. These difficulties are cogently and fairly stated by Mr. D. L. Dubey and I beg leave to quote his passage: "If the Government holds up its capital programme and suspends borrowing, it is charged with bankruptcy. If it raises a loan in London, a high price has to be paid, and sterling obligations are increased. If the Government offers a long-term loan in India, however, the yield is very small; if short-term loans are raised, they prove embarrassing as regards repayment or conversion at the time of maturity. If it borrows in the open market, money comes, from commercial centres, and trade and industry suffer as a result of financial stringency; if it offers a high price to attract money from the small investor, such as the holder of Cash Certificates, the banks complain of competition. If low rates of interest are offered in India, loans are not successful, and the danger arises of capital being exported abroad, by private investors permanently, and by bankers and businessmen for short intervals, to places where higher yields are obtained. On the other hand, if attractive terms are offered, they are likely to bring about a "clean sweep" of funds, deflation of the currency, stringency in the money-market and high bank-rate, difficulties in the way of transfer of funds to London where the greater portion of the capital expenditure is incurred, and finally, a weakening of exchange." 2

Notwithstanding these difficulties, it is not seriously denied even in official quarters that the organisation of the Government in the matter of raising their loans is not quite satisfactory, and that with a better organisation, the borrowings would have been wider and on better terms. In many countries which have public debt, organisations called National Debt Commissions, Loan Councils and so forth; exist to regulate the States’ borrowing and lending operations. At present, the substantial interest bearing and loanable funds (such as the proceeds of the Post Offices, provident funds, famine insurance funds, reserves and deposits of various kinds) are not entrusted to an independent organisation to look after their proper investment. In the matter of assignment of these funds to the several borrowing institutions like Railways, Provincial Governments and Local Bodies, the rates of interest charged and the terms are not governed by any definite principles. It is urged that for these purposes an independent organisation would prove helpful. It will also be useful in the matter of "issue of direct loans and the conversion of early maturities, the distribution of loanable funds between Central and Provincial Governments, the purchase and sale of securities, and the creation of facilities for the sale of sterling paper in India."3 All these functions are now concentrated in the hands of the Finance Department of the Government of India, though they are departmentalised and distinguished. Speaking of the Provincial Loans Fund, Sir Basil Blackett said that he looked forward to the day when the Fund may be administered by an independent Indian body similar to the National Debt Commission, and that considerable benefits would accrue to the finances of India, if the advances made by the Central Government to the Provincial Governments are excluded from the public debt of the Government of India. He further stated that not only the Provincial loans but also the Railway debt of the Central Government might be ultimately separated from the ordinary debt, and that the funds raised for these two purposes might, with advantage, be raised not on the general credit of the revenues of India, but respectively on the security of the assets of the Provincial Loan Fund and the Railway undertakings of the State, subject if necessary to a guarantee of the Central Government. He concluded by saying that, when such arrangements are completed, the true facts regarding the public debt of India would be less obscure than they are and the facilities for raising new capital would be widened.4 In their chapter on Provincial Debts, the Simon Commission also made similar proposals and recommended the formation of a Provincial Loan Council.5


Let us now turn to the way in which the sterling debt of India is raised and managed. The statement of the sterling obligations for the year 1931 given at page 7 shows three important items. Firstly, direct loans are shown at £ 315.97 millions. Secondly, war contribution is shown at £ 16.72 millions. This item requires some explanation. It is well-known that India promised a war gift of £ 100 millions to England. The bulk it was paid by raising special loans known as, War Loans. The balance was agreed to be paid to the British Government in installments. The Government of India agreed to treat that unpaid balance as part of a particular issue of 5 per cent British Government War Loan. The liability of the Indian Government to England under this head, which was brought down to £ 16.72 millions on 31 March 1929, remained at the same figure on 31st March 1931. Thirdly the capital value of liabilities undergoing redemption by way of terminable Railway annuities is shown as £ 50.32 millions. This item also, requires some explanation. The Government of India agreed with some Railway Companies to purchase their lines and to pay the price in instalments spread over a large number of years. Funds permitting, payments are made every year. The liability under this head is reduced gradually. This liability which stood at £ 70.6 millions in 1914, has been reduced to £ 50.32 millions in 1931. So, while the liabilities under the War contribution and Railway annuities have decreased, the direct loan obligations have increased from about £ 177 millions in 1914 to nearly £ 316 millions in 1931. From the figure of £ 316 millions, a sum of £ 22 millions has to be deducted to arrive at the actual amount of direct loan. This sum of £ 22 millions represents the debenture liabilities of the E. I. Railway and the G.I.P. Railway, which were taken over by the Government in 1924 and 1925, as a result of the assumption of the management of those Railways by the Government. These liabilities were those of the Companies to the debenture holders (the E. I. Railway, £ 18.5 millions; and G.I.P. Railway, £ 3.5 millions.) and the interest on these is paid out of earnings of those Railways. So, it is not really an increase in public debt of India, though its inclusion in the sterling obligations of the Government may be technically correct. So the real sterling loan on 31st March 1931 was about 294, and the net increase in direct sterling loans between 1914 and 1931 is about £117 millions. Most of it was borrowed between 1921-22 and 1931. The sterling borrowing, therefore, during the last decade was fairly heavy, working out on an average to over £11 millions a year.

The borrowing in London was particularly heavy in 1930 and 1931. During the last one year and a half, loans to the tune of £ 52 millions were raised including the most recent issue of £ 10 Million 1933-34 bonds at 6 per cent, of which 62 per cent were said to have been left on the underwriters' hands.

Whether these loan operations of the Indian Government in the London market were prudent and beneficial to India is a matter which is not free from controversy. It is an incontrovertible fact that, in recent years, borrowing in London was more expensive to India than borrowing in this country. It is also indisputable that India is treated by London as a less-favoured customer than Dominions like New Zealand, South Africa and Australia. The higher rates offered by the Indian Government on sterling loans provoked severe comment from the Indian public. The £ 7.5 million loan raised in 1921-22 at 7 per cent and repayable in 1926-31, was described even by moderate and friendly critics of the Government as a "financial scandal.’ In the same year, the Government could raise Rs. 49 crores in India at 6 per cent. In 1921 and ’22, New Zealand, South Africa and Australia paid much less than India. They got their money in London at about 5 per cent on the average. The 6 per cent rate offered by the Indian Government on their sterling loans in London during 1929-30 and 1930-31, also provoked strong adverse comment. This attitude of the London market towards India is very strange, particularly so, having regard to the fact that the bulk of the sterling debt borrowed in London is spent in England itself on the purchase of Railway materials and for payment of old Railway stock, thus helping the British trade and industry, which the Dominions do not do. The assets of India are also any day more secure.

There may however be cogent reasons for the London money-market not feeling enthusiastic over the Government of India's sterling loans in recent years. The forecasts of the Indian Government in respect of their borrowings, made in connection with the annual financial statements, are not much adhered to in practice. To cite the latest performance, on the 28th February this year, the Finance Member said that the sterling requirements for capital expenditure on Railways during the year 1931-32, would be £ 2.4 millions. But, within three months, the London Market was approached for a loan of £ 10 millions for Railways in India and general purposes. Borrowing for the conversion of £ 15 million 5.5 per cent loan, which matures in January 1932 and to which the Finance Member referred on the same occasion, is yet to come. The bulk of the public debt in London is contracted for expenditure on Railways. The lenders cannot be altogether indifferent to the consideration whether borrowing at 6 per cent or 7 per cent in London for investment on Railways in India, is a prudent operation. The return on Railways has been diminishing in recent years. Even in prosperous times, the Railways in India rarely yielded more than 5 per cent. Nevertheless, the rate of interest charged to Railways in 1929-30 was 5.31 per cent. It cannot be said that the London financiers let down India if they did not feel enthusiastic over loans at 6 per cent or 7 per cent to finance capital expenditure on Railways which hardly yield 5 per cent.

Indian public opinion always looked upon the soundness of the Government's Railways programme with a certain amount of scepticism. In times when money was available and was actually being raised in India and in England at 3.5 per cent or 4 per cent; the Government of India's guarantee of a 5 per cent return to the Companies which invested foreign capital in Railways in India, in addition to numerous other concessions, lacked justification and it has yet to be vindicated. The Congress Select Committee on Indian Public Debt complain of "the wastefulness of the guarantee system, which made the Guaranteed Companies utterly indifferent to considerations of economy in constructions or operations of their enterprises." This heavy interest guarantee had the additional disadvantage of putting up the price of the share or stock of the Companies, when the time came for the Government to acquire the ownership of those lines. The Committee, after instituting a comparison between direct State enterprise and Guaranteed Company enterprise in the construction of railways in the earlier years, found the former to be more economical. It seems to be now the turn for the State-managed Railway administrations to outshine the Company administrations in the matter of operation ratio. Mr. L. A. Natesan, M.A., B.L., of Calcutta, writing to the pages of the ‘Capital,’ adduces very cogent arguments to prove that the operating ratios of State-managed Railways in India are higher, compared with those of Company-managed Railways, by 6 to 9 per cent. He says that the "Railway Board has embarked on a scale of expenditure without due regard to its ultimate effects on the profit-earning, capacity of the lines under their control." (Vide page 224 of the ‘Capital’ of 6th August 1931 and page 271 of the same of 13th August 1931.) It is, therefore, difficult not to see the force of the regret of the Congress Select Committee that "the result is that the asset, which had been built up at such heavy sacrifices, still failed after fifty years to bring relief to the people of India; and instead served only to impose on them additional burdens."

There are certain other anxious features of the borrowing in London, to which a reference, however brief, cannot be omitted. There are already substantial short-term liabilities which will mature in the near future, that is, between 1931 and 1938, and in order to meet them, it will be necessary to go in for large borrowing of somewhere about Rs. 150 crores in India and £ 60 or 70 millions in London. This, in itself, is a bad enough commitment. To aggravate it by fresh short-term borrowing in London on the present scale seems to be risky and not quite prudent. There is another feature of these operations of which I heard something during the progress of the Indian Central Banking Enquiry. It was stated that, in recent years, there has been migration of Indian capital abroad, by no means negligible in volume, and that the high-rated short-term loans raised in London had something to do with it. Some knowing men also hinted that the prospect of a windfall, if the 1 sh. 6d. ratio were brought down (as it is bound to be, sooner or later), also acted as an additional stimulant in the case of some who could afford to keep funds in sterling investments in England, until that happy day came. Whatever may be the degree of truth in these conjectures, there can be no doubt that the large and frequent sterling loans raised in London at high rates have had very deleterious effects on India.

Why the London Market has become dearer to India than to the Dominions, is a matter into which it will not be easy to probe in a brief popular exposition like this of the outlines of the Indian Public Debt question. All that I feel concerned to say in this connection is that the allegation that the credit of India suffered in the London Market by the threat of debt repudiation, uttered at the Gaya Congress in 1922, is baseless. It will be remembered that a similar reason is discovered in the resolution of the Lahore Congress for the unsatisfactory response of the London Market to the latest sterling loans attempted by the Government of India. It is well to realise that the Congress, as a matter of fact, never said, or intended to say, that the investors in England or India will be refused repayment of their investments. The claim of the Congress has all along been that the burden of the obligations to the Indian and British lenders should not be thrown entirely on India, but that England should bear such portion of it as may be agreed upon between the two countries, or may be settled by an impartial and independent tribunal, in case an agreement is not reached. The claim is based, as already stated, on the fact that the British Government in England is responsible for the financial policy of the Indian administration in the past, in the matter of contracting and reducing public debt since the time of the East India Company. Why this claim of the Congress that not India alone, but India and England, shall bear the burden, should disturb the equanimity of the investors, it is impossible to imagine. Indeed the safety of the investors becomes considerably enhanced by the proposal of the Congress to pledge the credit of both the countries for the Indian public debt. Therefore, it seems to be not unreasonable to suspect that the propaganda in this behalf against Congress is interested.


The Government in the past, that is, before the Great War followed the policy of using the surplus revenues, which were a persistent feature of the first decade of this century, to reduce unproductive debt. In the year 1888, to go back to a quarter of a century before the War, the unproductive debt was almost equal to the productive debt. In that year, the total debt was £ 149.5 millions. Out of that, the unproductive debt was £ 73 millions and the productive debt was £ 76.5 millions. The unproductive debt was thus nearly one half of the total debt. Twenty-five years later, in 1913, the pre-war year, out of the total debt of £ 274.5 millions, the unproductive debt was only £ 25 millions, the rest being productive. The unproductive debt was just 1/11 of the total debt. So, in twenty-five years, it was reduced from 1/2 to 1/11. Indeed, we would not have had any unproductive debt at all today, but for the Rs. 100 crores of post-war budget deficits and the war gift of £ 100 millions.

But that method of reducing the unproductive debt from surplus revenues naturally came in for vehement adverse criticism from economists like the late Mr. Gokhale. His point was that persistent surpluses of revenue were really got from the funds taken out of the pockets of the tax-payer. Surpluses were created by under-estimation of revenue, over-estimation of expenditure, and high level of taxation. Such surpluses should legitimately have been returned to the people through remission of taxation or devoted for objects like the spread of education, improvement of sanitation, etc. (Vide ‘Gokhale and Economic Reform,’ page 219-222; and Prof. Kale's ‘Indian Economics,’ Vol. II, page 966).

Some portion of the capital sunk in State Railways was repaid out of Railway earnings by means of Railway annuities and sinking funds. A portion of the annual famine insurance grant used to be diverted to reduction of part of the ordinary public debt. This, of course, ceased after 1921, as the administration of the famine insurance fund became a provincial concern under the Montagu reforms.

During the War and for half-a-dozen years after its close, there were no surpluses, but deficits in some years. It was not until 1924 that the budget was balanced. The surpluses in subsequent years were largely devoted to the reduction of the provincial contributions. At the time of the presentation of the financial statement for 1924-25, the then Finance Member evolved and enunciated a regular programme for the next five years for reduction of debt. It is not proposed to enter into the technical details of that scheme. The particulars of the scheme were embodied in a resolution issued on the subject with the sanction of the Secretary of State for India. The main provisions of that scheme were that a sum of Rs. 4 crores plus certain additional sums shall be charged against the revenues of India in each year for the purpose of making provision for the reduction or avoidance of debt, and that such debt charge should be applied to meet Railway sinking fund, certain depreciation funds, capital portion of Railway annuities and so forth. The scheme has been subjected to some comment since then.

The present Finance Member introduced some minor changes in his predecessor's scheme. A re-examination of the provision for reduction or avoidance of debt was due in 1930. But it had to be put off owing to its intimate connection with the question of the adequacy of the contribution from Railways to the general finance under what is known as the Railway convention set up in the wake of the separation of the Railway budget from general budget, and the question of re-distribution of the central and provincial sources of revenue in connection with the impending constitutional reform. The following passage from the Finance Member's speech in which he announced the postponement of the revision of the scheme, will be found interesting: -

"According to the present convention, the Government receive, in addition to the refund of the actual interest which the Government have themselves to pay on loans raised for Railway purposes, a contribution, which, although it is made up of various elements, may be regarded as a percentage on the capital advanced to the Railways. Looked at in this way, it represents the distribution of even less than 1.25 per cent on the Government debt, which forms the basis of the present provision for reduction or avoidance of debt. In fact, I think it is, on broad lines correct to regard the one as balancing the other, and we shall arrive at a truer picture of what the Government draw from the Railways if we realise that, in fact, the Government get no profit but apply practically all that they receive, apart from a refund of their own interest payments, for the amortisation of their capital. When, therefore, the contribution falls below a certain figure, the Government, if they made up their accounts on a profit and loss basis, would actually show a net loss on the year. This is not the occasion for me to examine the justice or otherwise of this arrangement, but I think that what I have said is enough to show that the two arrangements are closely interconnected. I may say that, when I represented this close inter-connection to the leaders of the various parties, the response, so far as I received any, appeared to me to indicate a general agreement with my view that the two Conventions must be considered together. I feel, moreover, most strongly, on general grounds, that this is not the time when, keeping in view our credit in the world, we ought to attempt any substantial diminution in our provision for reduction or avoidance of debt. Anything that savours of a "raid" on a public Sinking Fund is normally–and, I think, quite rightly,–viewed with disfavour. I hope, therefore, that I shall have general agreement from Honourable Members that it is better to leave this provision substantially untouched and to bring it under review at the time of the general revision of finances, including a redistribution of the sources of revenue as between the Central Government and the Provinces, which must be a sequel to the proposals of the Constitutional revision which will shortly be before us."


The necessity to examine the origin and development of the Indian Public Debt arises from the stress of public opinion in India that the time has come for the financial obligations between Great Britain and India in the matter of Indian public debt being settled. The enquiry into the history of India's public debt and the way in which it was discharged in the past is, therefore, not one of antiquarian or academic interest. It is true that matters of present concern to us in the field of financial administration of India are the nature and extent of our interest-bearing obligations in India and England, the nature and extent of the interest-yielding assets held against those obligations, the volume of ordinary or unproductive debt, provision for reduction or avoidance of the debt, and the Government's policy and programme of borrowing. If, however, it is proved that the resources of this country were, as a matter of fact, utilised by the British administrators of India to discharge liabilities which should never have been imposed on India and should legitimately have been borne by Great Britain herself, then Great Britain becomes accountable to India for such funds. For the ascertainment of those obligations a careful investigation into the origin and subsequent career of the Indian Public Debt is inevitable. The Congress Select Committee's endeavour to ascertain "the fitness and propriety, the equity and justice of liability for obligations hitherto placed on India" must be said to be the first systematic enquiry of its kind and the methods of the Committee's approach to the subject and the data collected by them deserve careful study. The principle adumbrated by the Committee is that India shall not accept liability for any item of the public debt, "if any taint attaches to its creation or growth, which would render any part of it not binding." Mr. Kumarappa, one of the members of the Committee, in his separate note, states the principle in a somewhat different manner. According to him, "if the original debt of India is proved to be wrong, then it is but right to demand restitution of all payments made in respect of such a debt." The difference between the formula of the Committee and that of Mr. Kumarappa is clear. Mr. Kumarappa wants England to refund the misapplied funds with interest. He takes his stand on the business view-point that, if the liability for the "tainted" debt was originally laid on the right shoulders, and was met out of the British Exchequer as it should have been, the interest charges would have fallen on Britain, she being the right party who should have originally paid. In so far as any such debts were paid from Indian revenues and resources, India shall, in his view, get credit for them with reasonable interest.

It must be acknowledged that, in the investigation of this difficult problem, the Committee have manifested a desire to be impartial and to bring a judicial frame of mind to bear on the delicate task set before them. With the best of goodwill, the Committee could not have exonerated the British trustees of India from all liability in respect of their management of India's public debt in the past. Moreover, the Committee's conclusions do not come upon us as a surprise. The story of the origin and growth of Indian public debt has come under review before, though not with the same thoroughness or with any definite financial aim. Prof. Kale, eminent and balanced Indian Economist, narrates the story of our public debt in these brief but significant words: -

"In the time of the East India-Company, political and commercial functions of the State were mixed up together. The continued wars which the Company had to undertake, went on adding debt to debt steadily from year to year, though a part of the deficit was supplied from the commercial profits of the Company. The British acquisition of India cost England nothing and was secured out of Indian resources; and the cost of the conquest was the main cause of the growing public debt. The total ‘territorial debt’ of India in 1792 was £ 7 millions and increased to £ 30 millions in 1829, to more than £ 51 millions by the middle of the 19th century, and to £ 69.5 millions in 1858. The Mutiny made huge additions to the public debt, and it went up to about £ 129 millions in 1876." 6

The debt stood as follows during the subsequent years: -

31st March In millions of Pounds

1888 149.5

1898 197.8

1908 245.0

1913 274.3

The figures for the years subsequent to 1913 have already been given.

A picture given by a foreign economist also may be presented in this connection. The American Professor, L. H. Jenks, writes: -7

"The burdens that it was found convenient to charge to India seem preposterous. The cost of the Mutiny, the price of the transfer of the Company's rights to the Crown, the expenses of simultaneous wars in China and Abyssinia, every governmental item in London that remotely related to India, down to the fees of the charwomen in the India Office and the expenses of ships that sailed but did not participate in hostilities, and the cost of Indian regiments for six months’ training at home before they sailed,–all were charged to the account of the unrepresented ryot. The Sultan of Turkey visited London in 1868 in state, and his official ball was arranged for at the India Office and the bill charged India, A lunatic asylum in Ealing, gifts to members of Zanzibar mission, the consular and diplomatic establishments of Great Britain in China and in Persia, part of the permanent expenses of the Mediterranean fleet and the entire cost of a line of telegraph from England to India, had been charged before 1870 to the Indian Treasury. It is small wonder that the Indian revenues swelled from £ 33 millions to £ 52 millions a year during the first thirteen years of Crown administration, and that deficits accumulated from 1866 to 1870 amounting to £11.5 millions. A Home Debt of £ 30,000,000 was brought into existence between 1857 and 1860 and steadily added to, while British statesmen achieved reputations for economy and financial skill through the judicious manipulation of the Indian accounts."

The public debt of India, by a natural historical division, falls into two parts: that incurred under the East India Company's rule (1783-1857) and that incurred under the direct rule of the British Crown (1858-1931). The public debt of India on the 30th April 1857 was £ 51 and odd millions according to the Indian Expenditure Commission, popularly known as the Welby Commission. As to the manner in which the public debt accumulated to £ 51 and odd millions by 1857, the Congress Select Committee has the following observations to make: -

"Since the year 1783, the surplus revenues from the territories administered by the East India Company were, for all practical purposes, appropriated by them towards the commercial side and must have eventually been distributed amongst the share-holders, while the deficits in the territorial side were allowed to accumulate and ultimately became a part of the item of 51 million pounds which was the public debt as at 30th April 1857. The said public debt was largely caused by the expenses of warlike operations and acquisitions of territories."

The unproductive debt incurred after India came under the direct rule of the British Crown (1858-1931) is placed by the Committee in four categories: (i) debt that is caused by the internal wars and foreign wars and expeditions, (ii) debt arising from financial mismanagement or incompetence resulting in budget deficits traceable to many factors, of which the heavy cost of civil and military administration is one, (iii) debt occasioned by or traceable to famine relief, and (iv) debt due to loss on account of exchange, (a fruitful source of budget difficulties and indebtedness.)

In dealing with items (i) and (ii), the Committee have subjected the military expenditure of India to a very critical examination. One interesting observation of the Committee is that, in the ratio of military expenditure to the total expenditure, India stands first in the world. The places occupied by the principal militarist countries on a list of 41 countries, prepared on the basis of the ratio of their military expenditure to their total expenditure, will be seen from the following table: -

Rank Name of Country Percentage of military

expenditure to total


1st India 45.29

5th Japan 26.57

9th Italy 23.46

14th France 19.75

25th U.S.A. 16.09

30th Great Britain 14.75

37th Germany 7.16

Regarding the nature of the obligations incurred on account of external wars, the Committee quote the following opinion of Sir George Wingate, who says: -

"Most of our Asiatic Wars with countries beyond the limits of our Empire have been carried on by means of the Military and Monetary resources of the Government of India, though the objects of these wars were, in some instances purely British, and in others but remotely connected with the interests of India. They were undertaken by the Government of India in obedience to instructions received from the British Ministers of the time acting through the Presidents of the Board of Control; and for all consequences they have involved, the British Nation is clearly responsible."

Another piece of interesting information in connection with these items is that of the cost to India on account of the Great War. The total contribution of India in men was 1,470,000 of whom 9,53,000 served overseas. The casualties amounted to 1,06,594, which included 36,969 deaths. In terms of money, the war cost to India is put by the Committee at Rs. 170 crores, besides the war gift of £ 100 millions. In regard to the war gift, the Committee raised a constitutional point of first-rate importance, when they said that, "The Government of India under the statutes by which it is regulated had no power whatever to make a gift to Great Britain out of the revenues of India." Having regard to the presence of an eminent lawyer and ex-Advocate-General like Mr. Bhulbhai Desai on the Committee, the observation deserves serious examination.

Dealing with the third item of famine relief, the Committee comment on the manner in which Government borrowed heavily for relief of distress before regular financial provision was made for famine relief, but end by saying that "whatever may be the immediate reason for this debt and whatever its amount and burden, India cannot object to accept liabilities to meet the debt.’

Dealing with the fourth item, the Committee point out that the loss on Reverse Councils (in 1920-21) alone was Rs. 28.5 crores. Securities which were purchased from Indian funds when the rupee stood at 1.6d. were sold by the Secretary of State when the rupee stood at 35d. to provide funds for the Reverse Council Bills (Bill sold upon him by the Government of India.)

As a net result of the Committee's investigation, the aggregate claim of India against England is put at Rs. 729.4 crores and the following summary gives the details thereof: - 8

Year Subject of claims Crores Amount

Prior to External wars of the

1857 Company 35.000

Interest on Company's

Capital stock paid,

1833-57 15.120 50.120

1857 Cost of ‘Mutiny’ 40.000

1874 Interest on Company's

Capital Stock paid,

1857-74 10.080

Redemption of the

Capital Stock of East

India Company 12.000 22.080

1857-1900 External Wars 37.500

1914-1920 European War-gift 189.000

European War Cost 170.700 397.200

1857-1931 Miscellaneous charges 20.000

In respect of Burma 82.000 102.000

1916-1921 Reverse Councils Losses

Premium paid to Railway

Companies on acquisition

by the State 50.000

Cost of Strategic Railways. 33.000

Total Claim (Crores) Rs. 729.400

It may be conceded that this is not the last word on the subject of India's claim against Great Britain in the matter of the apportionment of financial obligations between them. I do not think that the Congress itself has taken such an attitude. The case for India is presented in the report. It is for those who dispute the accuracy of the data, or the tenability of the conclusions of the Committee, to come out with their case. The report at all events has made out a case for a discussion of the problem between the two countries with a view to see if an agreement can be arrived at, and, if no agreement is come to, for setting up an independent tribunal to investigate the matter and make such apportionment as may be found to be just and equitable. The present time, when a self-governing constitution for India is in the making, is the most opportune for the examination of the problem of Indian public debt with a view to ascertain whether any and what portion of it is not binding on India. We have a clear precedent for this course in the case of the Irish Free State. It is essentially a matter for adjustment when the constitution is radically overhauled. Clause 5 of the Ireland (Confirmation of Agreement) Act runs thus:-

"The Irish Free State should assume liability to the service of the Public debt of the United Kingdom as existing at the date hereof and towards the payment of War Pensions as existing at that date, in such a proportion as may be fair and equitable having regard to the fair and just claim on the part of Ireland by way of set-off or counter-claim, the amount of such sums being determined in default of agreement by the arbitration of one or more independent persons being citizens of the British Empire."

By the Act of 1925, the Free State was released from the obligations imposed by the clause quoted above, and England not only "bore all the costs of the great struggle between Ireland and England, but also took over the liabilities of Ireland's proportion of the national debt."

India claims no more than what was conceded to Ireland and will not be satisfied with less. India demands not only political freedom, but economic justice as well.

1 Quoted at p. 296 of Dubey's ‘Indian Public Debt.’

2 D. L. Dubey: The Indian Public Debt. pp. 294-95.

3 D. L. Dubey: The Indian Public Debt. page 336.

4 Vide Legislative Assembly Proceedings 1926, Budget Speech.

5 Vide Chapter III of the Report.

6 Vide ‘Indian Economics’ by V. G. Kale Vol. II, p. 959.

7 Vide ‘Migration of British Capital’ by L. H. Jenks, p. 223-224.

8 This figure does not include the additional claims made by Mr. J. C. Kumarappa in his separate notes 1 and 2 appended to Vol. I of the report by Mr. K. T. Shah in his separate note published in Volume II. The figure Rs. 729.4 crores is one on which the Committee were unanimous.