‘Opium profits funded many banks, insurance, and shipping companies in Bombay and Calcutta’

Tirthankar Roy teaches economic history at the London School of Economics Science. His book The Economic History of India 1857-1947, has changed the way Indian economic history is studied and taught worldwide. He is also the author of the The East India Company – The World’s Most Powerful Corporation (Penguin Allen Lane 2012). In this interview he speaks to Vivek Kaul on the way the East India Company operated in India and the impact it had on Indian business and economy.
How and when was the East India Company formed? What were its initial goals?
The English East India Company was formed in 1600, after a series of informal and formal meetings between ship captains, merchants, and bankers of the City of London, all of whom wanted to develop trade with Asia, in particular, to procure more black pepper from the Indonesian islands, which sold at an astronomical price in Europe.
Gurcharan Das in the introduction to your book writes “The modern corporation is, indeed, a child of the East India Company and there is much to learn from the mother’s failures and successes.” Could you elaborate on that?
Mr. Das is quite right; the Company was the first multinational, in that its London head office and its offices and warehouses in India were all parts of the same firm, thoughlocated thousands of miles apart in different countries. As in a modern multinational, the head office appointed the key officers who would run the operations in India. It was also a joint stock firm, that is, it pooled in the capital of many shareholders, which gave it much greater economies of scale and more capacity to absorb risks than a partnership or family firm of the time.
How similar or different is the East India Company from the modern multinational?
There was a difference between the Company and the modern multinational. In the case of the Company, the head office did not have full knowledge of what the branches were doing, and did not have complete command and control over the operations of the branches. This imperfect command problem arose partly because of physical distance which made travel and communication between the head and the braches very slow by modern standards.
Were there any other reasons for the problem?
Partly, the problem arose due to a social reason. The shareholders of the Company who controlled the London end of the operation and the rank and file in the branch offices came from different social classes. They did not completely trust each other. The shareholders were wealthy merchants and bankers, the rank and file came from poorer backgrounds and often joined the firm as sailors and soldiers. There was also a conflict of interest in the Indian side. The employees were paid small salaries, on the understanding that they would make some money by trading on the side. But then too much trade on the side hurt the Company’s own interest. How much is too much? There was constant tension over this question.
You mentioned initially that the Company initially started by trading pepper. It bought pepper in Indonesia and then sold it in Britain. You also write about the initial fleet of the East India Company coming back with pepper alone which was valued at a million pounds. How did the company decide on trading pepper? And why was pepper so much in demand?
Pepper was hugely valuable in Europe partly because it was thought to be the best ingredient available to hide the smell of slightly stale meat in cooked dishes, and partly because spices were demanded as a luxury article by the rich people. But alongside demand, there were supply side reasons as well for the high prices. Pepper and aromatic spices did not grow everywhere. They could not be easily cultivated either. They had to be procured from remote islands in the Indonesian archipelago or the mountains of Kerala in India, where climate and topography were favourable for growing spices. Not everyone had easy access to these sources. On top of that, the little pepper that came overland into Europe was solidly controlled by the merchants of Genoa and Venice, who were not friends of the English. That control also created monopoly prices.
In the second half of the 1500s, a leading explorer of the time, Ralph Fitch, travelled from London to Southeast Asia via India to explore the prospects of an English trade there. Fitch wrote a book on return, which was read, among others, by William Shakespeare. This book and some of the members of the tour were influential behind the start of the East India Company.
The Company eventually evolved a three cornered system of doing business. What was that? How did it help them?
The Company soon discovered that the means of payment for spices needed to be found within Asia itself, because not all peoples in Asia could be paid with European goods. Europeans could bring some woollen goods, but who will buy woollens in Indonesia or India? Therefore, it was looking for suitable Asian goods to exchange for spices. In particular, Indian textiles sold well in all of Southeast Asia, and both the Dutch and the English companies became interested in Indian cloth in order to use these to buy spices. Not only that; for some time, horses were purchased from Persia for sale to India, cotton textiles were purchased in exchange, and the textiles were exchanged for spices. Horses were in great demand in India, because the main armies consisted largely of cavalry, and there were no indigenous breed of warhorses. This was the three cornered system.
The company eventually built forts in Bombay (now Mumbai), Calcutta (now Kolkata) and Madras (now Chennai) and primarily operated out of these forts. Can you discuss this portion in some detail?
The Company initially negotiated trading rights with local states, like the Mughal province of Gujarat, the Emperor’s court in Delhi or Agra, or the provincial Governor of the Golconda state. They sought permission to trade from an established port that belonged to these powers. The three major ports were Surat, Masulipatnam, and Hooghly.But the need to defend themselves against the Dutch and the Portuguese, occasionally, threats from the Mughals and local rulers, and increasingly the need to run their own place by means of their own laws all led the Company to lease in or buy lands where it could create its own ports, docks, and naval stations. This is how Madras and Calcutta came up. Bombay’s origin was similar, except that it was initially received by the English King as a dowry in a royal marriage. Not knowing how he could use this place, the King handed it over to the Company. Because of the defence motive and the wish to create a government on a tiny scale, these towns always started with the construction of forts.
Would it be fare to compare these cities to special economic zones of today?
These three cities did share something in common with today’s SEZs, in that both tend to be export-oriented. But then, inside the SEZs, conditions of business depend on state policy. In these three port cities, there was no well-defined economic policy in existence.
How did opium come into the scheme of things for the East India Company?
Opium would grow in Bihar or Malwa (near Indore in central India), reach Calcutta or Bombay, was auctioned to overseas merchants, who would then take it abroad in special ships that were made to be defended against pirates of the China Sea. Once in China, the opium will be taken inland by the Hong merchants of Canton (Guangzhou/Guandong). It was an illegal substance in China, and the business in the interior could be done only by politically connected individuals. The Hong merchants fitted that role. They also had a lot of money. The opium was purchased with silver, which was then be used to buy Chinese tea. Tea, again, was sent back to England for resale to America. The tax on tea was a valuable income to the government. When these taxes were raised in 1773, the angry consumers staged the famous Boston Tea Party, where British tea chests arriving in Boston were thrown into the waters. That event again led to the American Revolution. In this way Asian trade changed world politics.
It is said that some of the biggest family owned businesses in India made their first fortunes in opium. It was that money which was used to expand into other businesses. What do you have to say about that?
This is true of some of the Parsee firms, especially the Tatas, even though the Tatas reduced their opium ties when the firm was actively moving into industry. Apart from individual firms, opium profits funded many banks, insurance, and shipping companies in Bombay and Calcutta.
Which were the communities that gained the most because of their association with the East India company?
The Parsees have been mentioned. They were mainly based in Surat and Bombay, and worked for the Company both as agents and contractors and also as shipwrights. In Calcutta, many prominent Bengali and North Indian merchants in the 1700s were friends of the Company. They actively helped the Company take over political power in 1757. This group included the largest firm of the time, the Jagatseths, who were a sort of banker to the court. In Madras, Telugu merchants were partners of the Company, and some of them acquired great wealth and power. Any direct link between gainers in the 1700s and successful firms today cannot be drawn, because Indian business world has diversified so much away from the old-style commodity trade.
You give credit to the East India Company for introducing the entire system of contracts in India. Why did India not have such a system earlier?
The idea of the contract, and probably some kind of law as well, did exist in India from before. But apart from loan transactions, in the matter of sale of goods, these rules were not very actively in use. Certainly there were no known state courts that settled merchant disputes over contracts. The Company needed to use contract heavily because it operated on a very large scale in a limited range of goods. It needed to buy cloth from hundreds of thousands of weavers made according to exact specification. It could not possibly do bulk purchases of cloth and maintain quality without some kind of advance agreements.
The problem, though, was that the Company was using contracts on a larger scale than any Indian firms without a proper commercial law. So, it exposed itself to numerous disputes over quality, quantity, delayed delivery of cloth, and clandestine deals between weavers and the Company’s rivals, the Dutch or the French.
You write towards the concluding part of your book that “the return of that process of skill-building is being reaped today in the form of net income that India receives by selling highly skilled services to the world”. Could you explain this portion in some detail?
In the 1800s, India exported a lot of commodities to Britain. The textile export trade had ended, but opium, indigo, tea, cotton, and later, wheat and rice, took its place. With the export surplus, India purchased skilled services from Britain. These payments were for the services of British military and administrative officers who ran the government, the services of scientists, engineers, doctors, and professors, again working for the government, as well as for foremen, engineers, and partners who were working in the private industries. These purchases were condemned by Indian nationalists as wasteful expenditure or a ‘drain’ of resources. But the drain theory is an exaggeration. Much of this payment went to hire a variety of skills that India did not have. These skilled people contributed to industrialization, big engineering works like irrigation canals and railways, and a university and a hospital system that were far ahead in the developing world of the 1800s in terms of quality.
And how did all this benefit India?
Today, India derives a lot of mileage in the world economy from the strengths built up a hundred or more years ago thanks to these purchase of British services. Its engineering schools, university education, scientific research, and the Indians’ head-start with English language, were all examples of the positive effects of what the nationalists called drain. The fact that Bombay, Calcutta, and Madras started modern factory industry already in the 1800s had much to do with the ability of India to buy knowhow and hire manpower from Britain in that time.
Does India suffer from the East India Company syndrome where we remain suspicious of foreign business?
The superstitious fear of the foreigner runs deep in the mind of the Indian populace and is constantly exploited by politicians and corporates today who do not want foreign competitors. They distort history in their favour, as many angry or fearful people often do. The uniformly negative light in which the Company is seen adds to this sentiment. Much of that sentiment formed in the 1920s and 1930s during India’s nationalist struggle. Important writers, including Jawaharlal Nehru, blamed the foreigners for the poverty of the Indians. This was a politically useful line then and a politically correct line even now. But it is bad history nonetheless.
Could you explain that in some detail?
It was then and it is now misinformed about the real story of the Company and its contributions to the making of modern India. When we think of the legacy of the Company, we should think of Mumbai, Kolkata, and Chennai. Without the East India Company, these places would in all likelihood have still remained the fishing villages that they were in the 1600s. Because of the Company they emerged not only as cities, but also huge cosmopolitan hubs of Indo-European business and the true symbols of globalization.
East India Company was the first MNC in the world. What can Indian corporations which are going global learn from it?
The Company’s business history tells us that doing business in another country always needs local partners and agents, and these partnerships are never easy relationships, because the partners can take advantage of the greater knowledge of the local scenario. Similarly, political tendencies in the country of operation are also a cause for concern to the MNC. Today’s MNCs are still subject to the same kind of uncertainty. Why do many joint ventures fail?
How do you compare the “crony capitalism” practiced during the times of the East India Company to the kind that is practiced in India now?
Business always needs to keep good relations with those who run governments, and governments also want friends in business. After all, a lot of tax comes from the corporates, and quite often, bureaucrats and politicians join private enterprise. This is a common factor between the world in the 1600s and the world in the 2000s. The difference is that in the earlier days, everything depended on informal negotiations. There was a big role for conspiracy and intrigue. Today, these relationships are, at least partly, based on legal principles.
The interview originally appeared in the Daily News and Analysis on October 22, 2012. http://www.dnaindia.com/money/interview_opium-profits-funded-many-banks-insurance-and-shipping-firms-in-bombay-and-calcutta_1754808
(Interviewer Kaul is a writer and he can be reached at [email protected])