Tuesday, December 17, 2013

Banking in India

The book ” The rise, progress, and present condition of banking in India” by By Charles Northcote Cooke, published in 1863 was the first to describe the prevailing commercial practices in the country and record the developments in western system of banking.  It notes (page 65-70) that the combination of railway network and availability of capital (through banks that were going to be set up) would unleash the potential of the country. It would release the natives from the tyranny of high interest charged by the traditional lenders of the land. 
"Nowhere is the investment of income more certain of good return, or more likely to be blessed than here. India has boundless resources, which merely require to be developed. If she has been hitherto a smaller producer than she might have been, it is owing to her being destitute of accessible markets for her surplus productions, in consequence of the rudeness of her productions. Every process, both in agriculture and manufactures, has been conducted with immense waste and want of ingenuity. The most simple methods of saving toil have been unknown. Husbandry is in a backward condition, and the implements both rude, primitive, and of the clumsiest construction. In fact, almost everything that is the produce of Indian rural labor is, when compared with that of people in a more civilized and favorable state of society, crude and unmarketable.
 There is, probably, no country in the world that has made such slow progress as India, when her antecedents are considered. Formerly, the natives of the soil, both morally and intellectually, stood higher than they do now, and excelled in all departments of science. But from this they have so completely, and for such a length of time declined, that it is difficult to believe that improvements in agriculture and manufactures were of very great antiquity in the provinces of Bengal. Indeed, were there not evidences of the truth of this statement, it would be scarcely possible to view it in any other light than as a jest, so completely have the implements of husbandry and agriculture, as well as the manufactures of the country, been stationary for centuries.
The state of the useful arts is scarcely more advanced than agriculture—probably little more so than it was a hundred years back:—and it is hopeless to expect much improvement until European skill and science shall be more extensively diffused over the country. There is, however, no absence of natural genius, nor want of conception in the people; and if only they will not allow their caste, (another name for idleness,) and their absurd religious prejudices, to raise difficulties and bar out the instructions of English science, an altered state of things may be anticipated. Until prohibitory rates of duty were placed on Dacca muslins—until Manchester and Paisley fabrics, of the same class, were admitted at lower rates of duty—what could compete with the former manufactures and the shawls of Cashmere, exquisitely delicate, and alike tasteful in fabrication and design? And what ingenuity could surpass the chaste workmanship of Delhi, Benares, Cuttack, and Trichinopoly in the precious metals?
"But for the future welfare of India," says a writer, "there is hope." When the steam engine shall have traversed the country from one end to the other, satisfactory results may be looked for. New wants will be created: her myriads will look to our work-shops and factories for the implements of toil and the adornments of luxury: capital, which is necessary to promote production, will find an outlet: opportunities will be afforded of employing it safely and profitably; and internal trade will consequently be stimulated and enlarged. It is from the absence of capital, properly directed, and from the want of those aids and appliances which are absolutely essential to the success of every country, that the resources of India remain to this day almost unknown. Until the commercial and agricultural interests of the country are properly advanced: until a considerable improvement take place in the products of the soil and in the implements of labor—her manufactures have little chance of being placed on a par with those of Europe.
And, foremost in the rank of those means that require to be used for a thorough development of India's resources, railroads must, as already stated, take a prominent stand. Before this mighty innovator, the oppressive barriers of caste will be thrown down; races, hitherto unknown to each other, will be approximated; and the internal commerce of the country, for many years depressed, will be fully opened out. Under the vivifying influence of British energy and capital, which a wider colonization will introduce; with good roads, good tramways, good feeders, and a sufficiency of steam on the rivers—trade and manufactures must make a step forward. If the waste lands, which Lord Canning's statesmanlike Resolution made attainable on fee simple, be taken up and properly cultivated, the enterprize and skill, which will be brought to bear, will result in improvements such as European capital and energy can alone effect; and conduce to the material and moral advantage of large classes of the people.
India has long suffered from the exclusiveness and monopoly of the East India Company. The senseless restrictions placed by that Corporation upon Europeans holding lands in the Mofussil, is one of the primary causes why the country has been retarded in her agricultural and commercial pursuits. Had there been a less restrictive policy, as well as less jealousy shown by the covenanted servants of the Company towards those whom they term interlopers, India would, at this time, have been in a position to render England independent of the United States' cotton. The fear of being dispossessed, and the dread of a too early enlightening of the natives, by leading the Government to oppose all attempts to improve the country, have obstructed the natural increase of capital, and, so far, tended to diminish the sum total of the revenue.
Colonization and capital then are the great desiderata for India.
By means of the former, the inland trade will be extended; commerce will increase commerce; and, although the area of territory is so vast, the progress of railways will influence both the money market and the development of the resources. By new facilities, new wants and new desires will be created; and neither climate,  religion, nor long-established habits, will refuse the benefits thereof.
By means of the latter—both the cause and result of industry—improvements will be made: better machinery will be introduced, and appliances, which involve considerable outlay, will be brought to bear. Without money, commercial operations must, naturally, be stinted and embarrassed. It is too much, however, to expect that any individual who shall embark his capital, whether it be money, machines, instruments of trade or other materials, can, however extensive his means, carry on his plans, on any large scale, without pecuniary assistance. And here it is that the utility of Banks will be apparent, in rendering active and productive that capital which it is their province to accummulate and distribute. Dr. Smith says, "The judicious operation of Banking enables the dealer to convert his dead stock into active and productive stock; into materials to work upon; into tools to work with, and into provisions and subsistence to work for; into stock which produces something both to himself and to his country."*
By "providing a sort of wagon way through the air, it enables the country to convert, as it were, a great part of its highways into good pastures and corn-fields, and thereby to increase, very considerably ,the annual produce of its land and labor." But it will do even more in this country. Banking will step in and relieve the borrower from the crushing effect of usurious dealings with the native money-lenders—a class of people the most grasping, relentless, and unprincipled to be found in any country. It will counteract the mischievous consequences, and the pernicious habit— so congenial to the natives—of burying money, or convertit into jewels for women and children—the fruitful cause of so many murders: it will bring forth and vivify millions of capital that lie dormant in the earth, or in secret hiding-places, while, by increasing the advantages of accumulation, and making saving available, as well for immediate profit as for a future resource, it will add new strength to the spirit of industry and to the principle of cumulation.

The sink of the precious metals

We know that Indians love hoarding gold. The relentless demand for this metal has meant that huge quantity has had to be continually imported. This year, when a serious current account deficit resulted, he Govt had to bring in restrictions and impose higher import duty to curb the inflow. According to many analysts, this move did not provide desired results as the demand was met through illicit channels and smuggling.
This tendency to hoard metal has been ingrained in the Indian psyche for hundreds of years. The book, “The rise, progress, and present condition of banking in India” by Charles Northcote Cooke, published exactly 150 years back, in 1863, makes the following observation on Page 71 (link)
"The eagerness of the natives for gold and silver ornaments will account, in a great measure, for the great importation of silver, and its disappearance in India, which PLINT aptly terms " the sink of the precious metals." The extent to which hoarding has been,and, in the Upper Provinces, is still practised, is almost incredible. Money-lenders generally keep their whole fortune, in coin, hidden about the house, and merely produce it when needed. Rich natives hoard as well as poor. Some years back, the King of Oude had half a million sterling secreted in coin. At Benares, a Rajah had a quarter of a million. Runjeet Singh, in the Punjab, one million. The late King of Ava a million and a half. When Scindia's fort was taken, there was found at least a quarter of a million. At the siege of Bhurtpore, one million is said to have been found by the British troops. At the taking of Seringapatam one million was found: and, it is positively asserted, that when the Emperor Shah Jehan died, he left no less a sum, in coin, than 24 millions sterling, all wrung from his impoverished subjects.
In the early part of 1856, Colonel Sykes, the Chairman of the East India Company, published an interesting paper on the External Commerce of British India, in which occurs the following passage:—" The excess of exports (from India) over imports is constant, owing to the gradual improvement in the producing powers of the country, and the small wants and hoarding habits of the natives in their present low state of civilization.Within the present century, India has received above 100,000,000 pound Sterling, which has never left the country. The silver received has been chiefly in coin, yet it has not in any appreciable manner affected prices." There is little doubt but that just before the mutiny of 1857-58, the expectation, throughout the country, of some great and terrific event, led to a more than ordinary absorption and secretion of the precious metals, which were converted into bracelets, anklets, earrings, necklaces,and waist-bands, as the safest mode in which treasure could be preserved. At the late sale of Kirwee prize property by Messrs. Hamilton and Co., there were to be found massive silver trappings of an elephant with chains sufficiently thick and large to serve as the ground tackling of a vessel of twenty-five tons."