In the previous Essay, I endeavoured to describe the financial condition of India, and I hope to be able in the following remarks to show the additional light which has been thrown on the present financial condition of that country by the budget which has been lately introduced at Calcutta, and by the financial arrangements which it is proposed to carry out both in England and India during the present year. The simple announcement that an exceptionally large addition to the indebtedness of India is to be accompanied not by an increase, but by a remission of taxation, is sufficient to show the extreme gravity of the financial situation in India. During the current year it is proposed to raise a 4½ per cent. loan of 3,500,000l. 2 in India; the country, and that, unless expenditure can be reduced, there is no margin from which to make any provision for such contingencies as war and famine, which we are officially told are certain to recur. Constant borrowing must consequently be regarded as the normal condition of Indian finance.

1 May, 1879.

2 The amount of the loan to be raised in India is 5,000,000/., and not, as here represented, 3,500,000l. It appears, however, from the budget statement for 1879-80, recently issued at Calcutta (see paragraph 268), that about 1,500,000/. of the 5,000,000/. which it is proposed to borrow is "needed to discharge, on the 1st of May next, the untransferred portion of the 5½ per cent. loan," and, Government have already announced their intention to introduce into the House of Commons a Bill which will authorise the Indian authorities to borrow 10,000,000l.1 in England; and 2,000,000l. is to be advanced, free of interest, by England to India, as a contribution towards the expenses of the Afghan war. It therefore appears that in a single year it is proposed either to borrow, or to take authority to borrow, no less a sum than 15,500,000l., an amount which represents more than one-tenth of the entire national debt of India. If it were possible to obtain additional revenue by fresh taxation, no one can suppose that the Indian Government would be so improvident as to sanction proposals which will cause such a large addition to be made to Indian indebtedness, without making any attempt to supply, by increased taxation, a portion of the deficit which has to be met.

It may, therefore, be concluded that, in the opinion of the Indian Government, the extreme limit of taxation has now been reached in that therefore, the "net amount thus called for is only 3,500,000l." I am so anxious not to overstate the financial exigencies of India, that I accept this conclusion, although it is important to bear in mind, as appears from the same paragraph of the budget statement, that the necessity of raising a still larger loan to meet this year's heavy deficit has only been avoided by resorting to the temporary expedient of providing 1,200,000l. "from the public balances."

1 This amount, after a strong remonstrance from the House of Commons, was eventually reduced to 5,000,000l.

Although it may be thought that nothing can exceed the seriousness of the state of things thus disclosed, the outlook for the future becomes even much worse when it is seen that, in the midst of this embarrassment, the Indian Government are surrounded with influences that compel them to surrender a portion of the revenue, which they themselves admit is altogether inadequate to satisfy the demands now made upon it. The import duties on cotton goods are, during the present year, to be partly remitted, at a cost to the Indian revenue of about 150,000l., which next year will be increased to 200,000l. No one for a moment will even pretend to say that, in the present state of Indian finance, the idea would have been entertained of remitting these duties if the finances of India were administered in the interest of that country alone.

The partial remission of these duties has been defended on the ground that they are protective in their character, and that it is wrong for free-trade England to sanction, in any form, the continuance of a protective duty. It is not, I believe, difficult to show that these duties are much less protective than is ordinarily supposed. It is important to bear in mind that in the Bombay mills, which are said to enjoy protection at the expense of Lancashire, the manufacture is almost entirely confined to the coarser sorts of cotton goods, upon which, when imported, no duty is imposed. But even if it is admitted that the import duties on cotton goods are as protective as they are alleged to be by the representatives of the manufacturing interest in England, it would be necessary, in order to justify the repeal of these duties, to show either that India could spare the revenue which they yield, or that it could be obtained in some other less objectionable form. When it is remembered that not a single year passes without a most serious addition being made to the indebtedness of India, it at once becomes evident that, as India has no surplus, she cannot surrender a single shilling of revenue without an equivalent amount being added to her debt.

As long, therefore, as the state of Indian finance is such that she not only has no surplus, but has annually to borrow in order to make good a heavy deficit, it is impossible to justify any remission of taxation, unless the sacrifice of revenue which such a remission involves is to be compensated for from some other source. No one, so far as I am aware, has suggested new taxation, by which it would be practicable to obtain the revenue which is yielded by these cotton duties. In considering questions of taxation nothing can be more unwise than to conclude that that particular tax must be the best which is most in accord with the principles of economic science. The tastes, the habits, and the wishes of the people on whom the tax is to be imposed ought to be most carefully considered, and I believe it will not be denied that of all the taxes which are levied in India, there are none to which the people of that country feel so little objection as the import duties on cotton goods. It is, moreover, particularly worthy of remark, that the repeal of these duties must certainly tend to create greater inequality in the incidence of taxation in India. It will be generally admitted that, owing to the difficulty of imposing taxes which reach the wealthy classes, an unduly large part of the revenue of India is contributed by those who are extremely poor.