Modes of extraction and use of surplus in Indian development

Amiya Kumar Bagchi, Institute of Development Studies Kolkata

amiya.bagchi@gmail.com

[Draft of paper to be presented in the Sraffa Conference to be held under the auspices of the
University of Rome 3, 2-4 December 2010; not to be quoted without permission]
[Abstract: The concept of surplus and its distribution was central to the discourse of AngloSaxon and Marxian political economy regarding the growth of incomes under capitalist
conditions. Piero Sraffas derivation of the profit-wage curve under conditions of equalization of
profit in a system of production of commodities by commodities settled the issue of whether
capital as an aggregate measured by accountants can be considered to be productive on its own,
and whether the equation of profit rates to the marginal productivity of capital makes any sense
at all. In a system in which land ownership becomes the predominant instrument for sharing in
the social surplus and absolute rent plays a critical role in that share, profit rates need not be
equalized across different sectors. Nonetheless, there is an aggregate surplus to be shared
between the property-owners and the state. (The mechanism of extraction of surplus need not
guarantee subsistence to the workers and peasants, so the system may reproduce itself by using
newer lands and newly subjugated populations).
In colonial India, under British rule, the state became the major claimant of the surplus.
Since this surplus was remitted abroad or utilised for military and administrative purposes, it had
a retrogressive effect on the Indian economy and society. While legal recognition of slavery was
withdrawn in 1843, various kinds of agrestic serfdom and debt bondage survived till the time of
independence. But the cessation of the remittable tribute extraction after independence and some
state support for economic activities almost immediately raised the rate of economic growth
before pre-independence levels (which were negative most of the time).
After independence, while the state took initiatives to foster large-scale industry both in
the private and in the public sector, the social structure of villages and patterns of landownership
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were not changed except in a few states, from the late 1950s. With the pull of larger investments,
the part of the surplus used for productive purposes began a slow rise. With low tax rates for the
rich, merchants undertook predatory commercialization, grabbing assets of the poor and the
socially disadvantaged groups without investing in productive capital. With the creeping
deregulation of the private sector in the 1980s and the official adoption of neo-liberal policies in
1991, many regions went straight from landlord domination into corporate control with the same
social groups in power. Opening up of tax havens and the exemption of long-term capital gains
from taxation enormously increased inequality, dramatically illustrating the relevance of
Kaldors neo-Pasinetti theorem. ]

England was the first country in the world to undergo a transformation from a trading
manufacturing economy into an industrialized one. In an industrialized economy both the
employment and income generated by agriculture comes to form a smaller fraction of national
income The generation of a progressively larger surplus and its investment in better-paying and
more productive activities played a crucial role in that transformation. Anglo-Saxon political
economists from Petty, Davenant, Smith and Ricardo, French economists such as Richard
Cantillon, Quesnay and Turgot were all aware of the necessity of promoting accumulation of
productive capital and minimizing the surplus wasted on unproductive labour for effecting and
speeding up the transformation.
However, a country could accumulate a surplus by expropriating that generated by the
labour of another country. In that process, of course, the transformation of the victim of
expropriation into an industrialized society would be impeded and latent prospects of the victim
achieving industrialization could be aborted altogether. India and Ch ina were the leading trading
and manufacturing countries of the world, when bourgeois political economy began to make its
debut as a discourse among the policy advisors in the seventeenth century. The political
economists strongly argued that the profits from the re-exports of products obtained from the
East, meaning mainly India and China were as important as profits from internal trade and
production. In fact, armed competition for monopolizing as much of that trade as possible was
one of the prime movers of the endemic conflicts between Britain, the Netherlands and France.
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In spite of this, most of the histories of economic thought remain strangely silent on the role of
competition for acquiring colonies and monopolizing intercontinental trade in the rise and
development of political economy as a discipline (Bagchi 2010b).
So long as the Mughal empire in India, the Safavid empire in Persia and the Ottoman
empire straddling major land routes between Europe and Asia, remained strong, the conquest of
India remained only a project for the marauding European chartered companies. The collapse of
the Mughal empire gave the British East India Company (EIC) the opportunity to conquer
Bengal (in 1757) and begin the steady appropriation of the major part of the surplus produced by
the Indian economy (for a succinct account of the course of this appropriation and its effects on
the Indian economy and society, see Bagchi 2010. The major source of the tribute was the land
tax imposed on the Indian peasants. From 1765 the EIC obtained the Dewani of Bengal and Bihar
from the Mughal Emperor in Delhi, and the land revenues of Bengal financed not only the EICs
investment but also the wars of conquest that the EIC officials waged. Table 1 shows that when
Cornwallis and Wellesley were waging war against Tipu Sultan and the Marathas, it was Bengals
revenues that supported those assaults.
Table 1 Land revenue of different presidencies of British India (in s), 1792-1811
Year

Bengal

Madras

Bombay

1792-93

3,091,616

742,760

79,025

1800-01

3,218,766

957,799

45,130

1810-11

3,295,382

1,071,666

437,108

Source: Banerjea 1928, p. 187

Most of this land revenue was remitted in the form of commodities bought with this money and
exported abroad. In the above Table, Bengal also included the big province of Bihar, and the two
together accounted for the lions share of the tribute. In 1973 I had estimated the gross domestic
material product (GDMP) of Bengal and Bihar as Rs 474,250,000 or 47,425,000. Cuenca
Esteban (2007, Table 3) gives an annual average of net inflows from India to Britain over 17931807 to be 3,354,000. This does not take into account another million or two pounds the British
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were spending every year to conquer other parts of India, using the Bengal-Bihar revenues for
the purpose This meant that 7.07 per cent of the gross domestic product of Bengal and Bihar was
sent out of the country without any return. . This meant that 7.07 per cent of the gross domestic
product of Bengal and Bihar was sent out of the country without any return. We should
remember that the industrializing economy of England was not investing much more than 7 per
cent of its GDP during precisely the decades that India was fast changing from an economy with
a substantial share (ranging from 15 to 20 per cent) of the manufacturing sector in the GDP and
employment of the economy to one in which that share fell well below 10 per cent over the
course of the nineteenth century. The continual disinvestments or drain, to use a word that both
early British observers and nationalists used, meant that the production function was being
continually pushed inward, and people survived, when they did, by mining the land without
replacement of its nutrients, by adapting to lower value-added products that had a continually
squeezed domestic and a very small international market, and in some favourable situations and
conjunctures competing successfully with the privileged Europeans.
The British government extracted not only a differential rent from the peasants and forest
dwellers, but also an absolute rent, because it asserted ownership of all the lands under its direct
jurisdiction. For its Indian or other Asian subjects, the use of land was subject to condition of the
payment of a yearly, even half-yearly tax, under the threat of confiscation of the land if the tax
was not paid punctually. Peasants who were unable to pay the rent were subjected to coercion,
including torture by the government or the tax-farmers who were responsible for the payment of
the land tax. Many agricultural workers were tied to the more substantial farmers by debt or
traditional bondage, that was also imposed on their descendants. The Europeans were generally
not subject to the jurisdiction of courts that had Indian judicial officers, and judgments were
often biased heavily in favour of Europeans. Thus the basic social and political conditions for
equalization of rates of profit as between different sectors of the economy were completely
absent in a colonial country such as India (for a summary of the evidence relating to property
rights in British and French colonies, see Bagchi 2005, Part III; for an argument that Marxs
conditions for the extraction of an absolute rent cannot apply to economies in which rates of
return in different sectors are realized, and by implication, they may hold for feudal or colonial
societies, see Ghosh 1985)..
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In spite of all these constraints, with an earlier history of involvement in trade and
manufacture for local and global markets and under the impact of accelerated capitalist
globalization from the late nineteenth century, a small capitalist class survived and even grew up
in India. But the major part of investable resources was still remitted abroad, mainly as a political
tribute but also as profits of the privileged European traders, planters, mine-owners and
industrialists who chiefly engaged in processing agricultural products. I have estimated the
amount thus extracted from India by the imperial state and European businessmen (Bagchi 2005,
chapter 17). By combining that estimate with the best national income estimates of India in the
late colonial period we have (Sivasubramonian 2000), I estimate that even in the beginning of the
twentieth century 5-6 per cent of the national income of India was being exported abroad, with
virtually no return. No wonder then that the income per capita of the country remained either
stagnant or showed a declining trend throughout the period of colonial rule.
The colonial state effectively imposed almost a two-century long structural adjustment
programme on India in order to make it yield a perennial tribute to be remitted abroad. As
already indicated, the endemic depression caused to the economy and the methods of extracting
the surplus created a social structure in which private non-economic power, and coercive
measures used by a state apparatus with no accountability to the people, played a predominant
role.
In spite, however, of all the obstacles posed by a highly inegalitarian and coercive social
system inherited from the colonial period, growth in Indian national and per capita incomes
underwent a structural break almost immediately after independence, even though population
grew at much faster rates than under the colonial regime (Sivasubramonian 2000; Hatekar and
Dongre 2005). India inherited at independence divided by deep divisions between the so-called
upper and lower castes: the latter were in general much poorer than the former. Moreover, the
upper echelons of the indigenous bureaucracy, including the policing apparatus, were dominated
by the rich and the upper castes. The vast majority of the people were also illiterate and found it
difficult to access the affirmative action or the welfare measures promised by the Indian
constitution and encoded in laws. The Republic of India also failed to one extremely important
measure needed for empowering the people and energizing the productive potential even of the
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majority of the traders, substantial farmers and small-scale industrialists, let alone those of the
landless peasants and poor artisans. That measure would have been giving land to the actual
cultivators and sustaining their ability to make the land more productive and increase their oiwn
incomes by extending cheap credit to them and building up the rural infrastructure through
massive public investment, organized on a decentralized, ecologically sustainable basis.
However, from the 1950s, India adopted a kind of indicative planning under
which side by side with private investment in trade, industry and agriculture, the state promoted
industries in the public sector and subsidized private investment. From 1969, state action in areas
of industry, and banking and agriculture laid the foundations of accelerating growth from the late
1970s. In particular, the nationalization of the major commercial banks with a state directive to
open many more branches in rural areas and to give 40 per cent of the loans to priority sectors,
and substantial public investment in irrigation and rural infrastructure helped bring about a
green revolution and brought down the proportion of people living below the poverty line. In
the industrial seector, public investment in the capital goods sector and selective promotion of
R&D pushed up industrial growth.
With landlords still calling the shots in the politics and control of rural areas, the much of
the potentially investable surplus failed to be generated and a large part was squandered in
conspicuous consumption and maintenance of a repressive apparatus, although India was a
formally democratic state. The ratio of gross domestic saving (GDS) to gross domestic product
thus only slowly inched upward: from 9 to 14 per cent in the 1950s, from 12 to 15 per cent in the
1960s, from 15 to 23 per cent in the 1970s, and from 19 to 24 per cent in the 1980s. The ratio of
Gross domestic capital formation (GDCF) to the GDP followed a very similar pattern, with
GDCF exceeding GDS by a small margin in most years: the difference was mostly bridged by a
small amount of low-interest loans or foreign aid. (Whether the latter was needed at all, except as
a way of cementing international patron-client relationships remains a moot question.
Public investment and subsidization of credit and infrastructural services such as
electricity and transport costs stimulated the growth of the private sector. A section of the
private sector wanted less regulation of the state, and more welcome to private foreign
investment. This was the basic drive behind the neoliberal policies pursued by the central Indian
government. Although formally the neo-liberal reforms started with the signing of the agreement
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in June 1991, they had in fact been initiated in the budget of Rajiv Gandhi, placed before the
Indian Parliament in February 1985 (Bagchi 1985). That budget drastically brought down the tax
rates on incomes, especially those earning higher incomes, abolished the inheritance tax and
made it far easier for firms to spend foreign exchange. This was done not only under pressure of
local capitalists, especially those with strong links with foreign enterprises, but also in response
to the blandishments of international organizations which assured the government that India had
a high credit rating in the international loan market. By then India and China were virtually the
only two major developing countries not imprisoned in a debt trap. So the international financial
organizations needed new clients to lend to. I had predicted at the time that the steps taken by the
Indian government will inevitably generate unsustainable budget and balance of payments
deficits and will lead India into a debt trap.
I had also suggested that this was what many top Indian policy makers wanted, because
then they could implement neo-liberal policies after pleading TINA (there is no alternative)
(Ibid). This is exactly what happened by 1990, when an inspired leak from a Commerce
Department document gave out that the government would substantially devalue the rupee in
order to meet the balance of payments crisis So from 1990 onwards, foreigners ceased to put any
money into the Indian market, and more importantly many exporters stopped bringing back their
foreign currency earnings to India. The crisis foretold was upon India in 1991, and in order to
restore credibility, the Indian government signed an agreement with the IMF for a stand-by loan
under which it accepted many of the conditions of structural adjustment demanded by the IMF.
The rates of saving and investment went up again rather slowly after the initiation of the
neoliberal regime, the former hovering between 23 and 27 per cent between 1990-91and 19992000. The driving factor behind the gradual rise of the rates of investment and saving was a
rising share of non-agricultural and urban incomes, and increasing inequality in regional income
distribution, with the agglomeration effects attracting both investment and savings in the
growing regions. In spite of deregulation and increasing privatization of the economy, the tempo
did not really change until 2003-04 when the ratio of GDS to GDP went up to 32 per cent and
that of GDCF to GDP went up to 29 per cent. Since then, Indias GDCF rate has hover3d around
40 per cent, but GDS has failed to keep pace with it. India has run up increasingly large balance
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of payments deficits inits current account from 2005-06: the current account deficit grew from
US$2.47 billion in 2005-06 to US$3841 billion in 2009-10 (RBI 2010, Table 142). Domestically,
increases in income have been concentrated in the pockets of a small section (at most 15 per
cent) of the population and their demands for consumer goods of the standard of affluent
countries have also burgeoned (Patnaik 2007). That demand has been sustained not only by
growth in incomes but also by growth in their creditworthiness from the point of view of
financial institutions. Financial exclusion has gone hand in hand with concentration of formal
credit among a smaller and smaller section of the people (Bagchi 2007)..
Indias experience raises new issues on the role of finance in generating a surplus and
effecting a redistribution of both invested capital and non-renewable resources. Indias high
growth rate has also been associated with a fast rise in inequality of income and wealth.
Raghuram Rajan, formerly chief economist of IMF and a member of the Economic Advisory
Council of the Indian Prime Minister in an interview on 1 August 2010 said that he had no
problems with wealth creation:
"but I do think there is a problem if much of this wealth comes from proximity to
government". Pointing out that India had the second largest number of billionaires per
trillion dollars of GDP in the world (after Russia) prior to the crisis, and now possibly the
largest, Rajan said "If you look at the areas where we have so many billionaires, many of
them are not software entrepreneurs, it's things like land, real estate, natural resources and
areas that require licences." (URL: http://nanopolitan.blogspot.com/2010/08/raghuramrajan-on-indian-billionaires.html)
The process of concentration of assets and income in a few hands has been accelerated by
four major processes. First, the privatization of public assets often at lower than any reasonable
price has increased the wealth of the wealthy, and especially those who are major patrons of
important politicians. Second, the denial of credit to increasing numbers of farmers and small
entrepreneurs has bankrupted many of them and wealth has become concentrated in the hands of
people who could take over their land and business1. This process also means that the mass of
1

Karl Marx had discussed some of these processes, when analysing how capitalist ground-rent grows (see
especially, Marx 1894/1971, Part VI.

propertyless workers with little social insurance grows augmenting the natural growth of the
labour force. Third, the government has virtually abolished the long-term capital gains tax, so
that any gains made through a rise in real estate prices, rises in share prices etc. accrues tax-free
to the wealthy. Fourth, the government has promoted a tax haven in Mauritius, where Indians
have set up joint venture companies and have to pay only 10 per cent of their corporate income
as tax. Finally, some of that income as well as domestically accrued income can be used for
pushing up prices in the stock market, investing in real estate and acquiring other assets, both
renewable and non-renewable. Foreign investment further boosts capital gains in the stock
market and such boosting acts as another magnet for the foreign investment that is bridging a
large part of the gap in the current account deficit and pushing up the external value of the rupee,
and increasing the prospect of a currency crisis.
Under the current financial regime, bundles of commodities have themselves become
assets, and increasing concentration of assets in a few hands have become means of an ongoing
process of both incomes and assets from the hands of workers to those of the financiers and other
rentiers in the classic sense. In her brilliant exposition of Sraffas great book, Krishna Bharadwaj
(1963/1971) had pointed out that while Sraffa laid bare the relation between profit rates and
wage shares in the surplus produced in a competitive economy, the point at which the shares of
profit and wages settle down depend on exogenous factors. Those exogenous factors, in a
globalizing capitalism, have to include the way labour reserves are reproduced all around the
world, and assets are redistributed through geopolitical power plays and financial processes,
including the generation of capital gains in the stock market. Kaldor had used this route of
augmentation of profits to establish the so-called neo-Pasinetti theorem, namely that the income
distribution even in the not-so-long-run is determined by the realized saving rate of capitalists
alone (Kaldor 1966; Bagchi 2005a). But the determinants of the capital gains and the saving rates
of capitalists still lie outside the frame of the variables included in that analysis. In order to fully
understand the processes of inequalization in India and other countries we have to combine the
theorems of Production of Commodities by Means of Commodities, with a hard analysis of
financial and political processes of asset redistribution.

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