The few estimatesthat we can find on the Government ofIndia’s public investment allocation

highlight this exclusive concern “to govern” to the exclusion of other development activity.
Transpor¬ tation and communication (principally railways) was allocated about 65 percent of the
investment; public buildings received 20 percent; agriculture and irrigation 12 percent; and
industry, zero. Of the total gross expenditure of the Government of India, defense accounted for
40 percent, averaging about 3 percent of national income. The allocation for defense, however,
constantly increased between 1870 and the 1940’s reaching 7.7 percent of national income in
1944. Significantly in the post-Independence budgets defense expenditure has been generally
less than 4 percent of national income. The large and increasing expenditure for defense was,
however, only partly due to the British concern to contain internal uprising. Other reasons were
that the Government ofIndia and Britain were The Initial Conditions 33 concerned about a
Russian invasion ofIndia, especially during the late nineteenth and early twentieth centuries.
Britain also sent Indian troops to China, Persia, Africa (and to the World Wars) as part of its
imperial adventures. In World War I nearly a million Indian soldiers were deployed abroad
(among them Gandhi before he became the Mahatma). The GovernmentofIndia paid not only
forthe rising recruitment ofIndian soldiers, but also forthe British officers and soldiers who led
them. Under the decree issued afterthe Great Uprising of 1857, itwasstipulatedthat no Indian
could hold commissioned rankinthe army, and that for every three Indian soldiers, there had to
be one British officer or soldier. This was the policy till World War II. In 1917 India’s defence
budget in current prices rose to £30 million, or about twice the level reached forty years laterin
1957! Only 12 percent of this outlay was on capital items. Itissignificantthat all through the
nineteenth and early twentieth centuries, British economists showed scant interest in England’s
economic policy toward India. One exception was J.R. McCulloch [53], who remained critical
ofthe Government of India’ policy of ignoring economic development and concentrating on
raising revenues to administerIndia through the “erroneous Ricardian rent theory.” With other
economists the single-minded concern was with how to administer India effectively. Both James
Mill and his eminent son John Stuart Mill took the utilitarian view that providing good
Government to the “defective Hindu” was an end in itself. John Stuart Mill in fact stated: “The
question is, in what manner Great Britain can best provide for the government, not of three or
four millions of English colonists, but of 150 million Asiatics who cannot be trusted to govern
themselves[54]. Building onthis misinformation ormyth, AlfredMarshall wrote in his Principles
ofEconomics that India was backward because of the Hindu cultural “bad habits” of ostentation
and spending on festivals. In his testimony before the Committee on Indian Curr¬ ency, 1899,
Marshall thought India should be provided foreign capital “to educate the natives themselves to
store up capital.” Obviously the concept that the Government ought to provide 34 Economic
Growth in China and India economic leadership, in particular to provide credit and selective
protective tariffs, was not favoured. This concept is what Gerschenkron identified as the key
factorin the industrialization of the nineteenth century backward countries such as Russia. Thus
India’s contact with foreigners or the West was a missed opp¬ ortunity and unfulfilled promise
because the role of the colonial government (visualized as that of administering the natives
efficiently) was obstructionist and blocked the proper transfer of technology. In fact, as Rhoads
Murphy[55] infers, the social movements ofRaja Ram Mohan Roy and Dayanand Saraswati, and
the political moderation ofRanade could have laid the foundation for a fruitful collaboration
between Britain and India, much as between Meiji Japan and the United States. But instead the
British chose to become in India increasingly racist, beginning with Macaulay’s Minute on
Education[56]. This racism then led to the national awakening first in 1857, and then to
increasing confro¬ ntation through the preachings of Swami Vivekananda, to be followed by
Dadabhai Naoroji, Aurobind Ghosh, Subramania Bharathi, and finally Mahatma Gandhi. The
developments in China also show the same insensitivity of government to entrepreneurship. The
first Chinese iron and steel plant was set up in 1894 in Hanyang, with machinery purchased in
Europe. This was two years before the first Japanese works in Yawata. By 1914 Hanyang had
completely failed, although Yawata boomed on cheap Chinese ore! Here again the reason is that
the primary motivation ofthe Government was noneconomic in nature. The plant was located in
Hanyang for “prestige” reasons[57]. No analysis ofChinese ore and coal was made, and yet
officials sitting in Peking ordered Bessemer converters and found these produced steel with a
high phosphate content, quite unfit for railroads. Because the site was improperly chosen, the
company had to make huge outlays for drainage and leveling of marshy and low land.
Furthermore, fat expense accounts were allowed, and after paying warlord-owners Sheng
Hsuanhuai and others, there was hardly any plough-back ofprofits. Hanyang steel wasthen priced
at £48.50per ton, which was higher than in other countries, notably India. The Chinese
Government’s attempt to step up the rate of The Initial Conditions 35 investment also failed
because of the “bureaucratization” of pro¬ cedures. The Kuan-tu Shang-pan industrial
organization could neither provide the Chinese investors with adequate capital nor underwrite the
risk involved in new ventunes[58]. The same type of organization, however, proved to be a
successin Japan. The reason for the failure in China is attributed by eminent Chinese thinkers
such as Dr. Hu Shih[59] to a lack of “effective leadership” on the part of the imperial
government of the Manchu dynasty. Dr. Hu Shih’s view was that the abstention ofthe
government was crucial because nowhere else could leadership be located. This latter vacuum he
attributed to “the accumulated deadweight of over a thousand years of Indianization” of China!
[60].- The Investments carried out by the Kuan-tu Shang-pan organ¬ ization were too small to
transform the economy. To undertake large investments, the government would have had to
restructure the fiscal system. But revenues were declining because of civil wars, and
expenditures were rising because ofindemnities paid to foreign powers. The imperial government
continually verged on bankruptcy. Besides this, private entrepreneurs also did not invest in these
concerns. Almosts all the Kuan-tu Shang-pan organiza¬ tions suffered because of fat expense
accounts and guaranteed dividends. The China Merchants Steam Navigation Company, which
began very well, by 1900 fell behind the China Navigation Company (British-owned) because
not enough profits were ploughed back into the company. The China Merchants’ Company made
handsome profits, but due to its payment of an annual divi¬ dend of 15 percent during 1873 -
1914 failed to grow commensurately. The same malady afflicted the Hanyehping steel industry.
The Imperial government did borrow heavily from foreigners. But ofthe total borrowings, 44
percent were expended on military and indemnity payments, 20 percent on administration, and
only 5 percent on industrial development Indeed itmay be concluded that the inability of the
Chinese Government to commit the nation to a program of economic development and the
failure of the Chinese elite and statesmen to persuade a conservative courtin Peking, were
responsible for the century-old stagnation in China. This inability and failure enabled western
imperialism to take root in China. Even 36 Economic Growth in China and India after
imperialism confronted China, the response to colonialism was negative in contrast to that
ofJapan. China, compared to India, had some serious disadvantages as well. In India the efficacy
and power of technology had been demonstrated by 1840. The Indian elite had by then been
completely persuaded on this score. For China it was not until 1895 that the realization came in
full force. Second, social reform movements began in India around 1820. Notable leaders,
intellectuals, and spiritual men campaigned against archaic practicesin India society. The
Government ofIndia was, however, most reluctant to push through reforms wanted by the social
reformers forfearof“stirring up the native.” By contrast, in China the social reforms movement
did not develop until 1890. Third, in terms of taxation and observance of laws, the Chinese
investors were at a greater disadvantage than their Indian counter¬ parts. In India foreign
investors had to pay the same taxes as indigenous investors and were subject to the same laws -
at least as far as the letter ofthe law went. In China foreign investors did not have to pay Chinese
taxes, nor were they subject to the stringent Chinese laws until 1942[61]. This placed the
Chinese investor at a substantial handicap. Fourth, the Chinese Government’s thinking was
absorbed with the need for defense. On one hand, they had to combat five foreign countries, and
on the other hand, they had to expend huge sums to put down domestic rebellion. The Indian
Government, in contrast, had greater opportunities to engage in economic development work
because there was no foreign threat; the domestic revolt of 1857 had been put down very firmly,
and there was no subsequent organized “insurrection” to repress. That the Government of India
did not use the opportunity is another matter, and has been discussed above[62]. Itisthus
remarkable that China with all its limitations and instability achieved almost the same growth
rate as India, which had had decades ofuninterrupted political stability