It is now generally recognised that no public question is of more urgent importance than the reform of Indian finance, and I have decided to republish the three essays contained in this volume, in the hope that they may possibly render some assistance in showing what is the true character of the financial condition of India, and what are the measures which it will be necessary to adopt to place her finances on a sound and satisfactory basis. In the first Essay, which was published in February last year, I endeavoured to describe the most salient features of the actual financial condition of India. Particular attention was directed in this essay to the erroneous conclusions which are frequently arrived at with regard to the amount of the real revenue which is available to meet the ordinary expenses of government. By arranging the various items of revenue and expenditure under different classes, and by carefully distinguishing the net from the gross receipts, it was shown that the real revenue of India is less than 40,000,000l.1 With a comparatively stationary revenue of this amount, a rapidly-increasing expenditure had to be met. All available sources of taxation had been so nearly exhausted that large loans had each year to be raised to meet the deficits which were regularly accruing.

Constant borrowing had consequently become the normal condition of Indian finance, and her indebtedness was rapidly and steadily growing. The budget for 1879-80, which was introduced at Calcutta soon after this Essay was published, strikingly corroborated the conclusions which were thus sought to be established. During this year the finances of India were prejudicially affected by various adverse circumstances. The cost of the Afghan war had to be met; an increasing loss by exchange, produced by the depreciation in the value of silver, put a severe strain upon her resources; various public works, which involved a heavy outlay, had already been sanctioned; the diminished revenue returns yielded in certain districts showed that in some parts of the country the effects of the recent famines were still severely felt; and the financial situation was further aggravated by an increase in the military and other branches of expenditure. From the budget arrangements of the year it at once became evident that all the worst anticipations as to the financial exigencies of India were to receive a practical corroboration.

In the second Essay, which was published in May, soon after these arrangements were made known, it was shown that the Government, from the measures which they proposed, apparently thought that India was so entirely without any financial reserve, and that all the sources of fresh taxation were so exhausted, that no effort could be made to obtain additional revenue. Consequently the whole of the exceptional expenditure could only be met by borrowing. The loan operations of the year were to be on so extended a scale that the critical state of Indian finance was at once disclosed, and on all sides the gravity of the situation was at length fully recognised. A loan of 3,500,000l. was to be raised in India; 2,000,0002. was to be advanced by England to India, free of interest, towards the expenses of the Afghan war; and soon after the budget was introduced at Calcutta, it was announced that the Government would ask Parliament for authority to borrow 10,000,0002. in England. But serious as was the state of things disclosed by these exceptionally large borrowing operations, the outlook for the future became far worse when it was seen that in the midst of this embarrassment the Government of India were surrounded by influences which compelled them, in the administration of her finances, to sacrifice her interests to the interests of England. Simultaneously with the announcement of the large loan operations which were about to be undertaken, it was stated that the revenue of India, which was admitted to be inadequate to meet the cost of government, was not to be maintained, but that 200,000l. of this revenue was to be sacrificed by a partial repeal of the cotton duties.

It need scarcely be remarked that nothing can be more indefensible than to reduce taxes when there is a deficit, and when, consequently, every shilling of the taxation remitted necessitates a corresponding addition to the debt.

1 See table, p. 21.

When the Indian budget was considered in Parliament (May 22, 1879), the Government made no attempt to conceal the extreme gravity of the financial situation. It was unreservedly admitted that as the revenue could not be added to by increased taxation, a reduction of expenditure became a matter of imperative necessity. In the last of the three Essays in this volume, which was published in October, I have endeavoured to show that this recognition by the Government of the true state of Indian finance, and the promises with which it was accompanied of carrying out in every department a policy of the most rigorous economy, are so important that they may be regarded as constituting a new epoch in Indian finance. It is not too much to say that unless a policy of retrenchment is resolutely persisted in, nothing can prevent India being involved in the most serious financial embarrassment. All experience shows that any Government which attempts to carry out a policy of retrenchment will have to encounter many most formidable difficulties, and in surmounting these difficulties they may fairly claim all the assistance which public opinion can afford.

It will, I believe, be found that in order permanently to place the finances of India on a sound basis it will be necessary to effect some important changes in her present system of financial administration. It will now be generally admitted that when the Government of India was transferred from the Company to the Crown, many safeguards for economy were swept away, and the substitutes which took their place have proved to be comparatively ineffective.