Abstract

This article presents a case study on the development of railroads in India during British rule (1845–1924), focusing on the unique relationship between ownership and control that gave rise to freestanding companies stand-alone firms based on foreign direct investment. It explores historical patterns of public intervention and foreign financing in building one of the world’s largest railway systems between 1875 and 1921. The paper highlights how British-led railway expansion after 1850 became an early example of public-private partnership. It also examines the distinct organizational models of British-sponsored railways in India. Given India’s current infrastructure financing need of $4.5 trillion by 2040, the study concludes by drawing lessons from this historical experience to help boost private investment in modern infrastructure.

Keywords: Infrastructure Creation, organization form, innovation, employment, public private partnership, foreign direct investment.

1. Introduction

Much of the nineteenth-century railway infrastructure projects in India were privately financed and built. But government interventions (in the form of subsidies and loan guarantees) and foreign capital were important components. Investors with government-guaranteed loans had no incentive to monitor the firm’s performance, leading to diversion of funds and frustration of public interest. 

Government subsidies and foreign borrowings (FDI) are the two escape routes for low-income countries like India to come out of the low-level equilibrium trap (lack of infrastructure limits investment and lack of investment limits infrastructure). If domestic funds are not available (as was the case in India during British rule, when the quantum of funds required for the massive construction of Railways in India was not available), construction was financed by British free-standing companies, and government guarantees were the prominent features of these FDIs. In the second half of the nineteenth century and the early twentieth century, three-fourths of the recorded investment in India was FDIs, and two-thirds of FDIs were in railways (Silva Alvaro, 2014). In other words, these British companies constituted a significant proportion of direct investment, i.e., they are the dominant force in British FDI, and within this category, railway companies were pre-eminent. These were the earliest examples of PPPs as private finance was used for creating a public utility. Government guarantees used to subsidize infrastructure investment and to attract foreign investment, relaxing credit constraints on one hand and weakening the incentive for creditors to monitor management on the other. The government guarantee of the minimum rate of return (5% in the case of India’s early railways), the government made up the difference by taxing the Indian public. Since the reasonable costs of idiosyncratic projects like railways are intrinsically difficult to ascertain and construction generates abundant cash flow, the diversion of resources into the pockets of promoters was relatively easy to arrange.

2. Contours of Rail Development in India 

The railway system of India was conceived and executed as a colonial project. British authorities, with little input from Indians, decided when and where lines would be built. The interests of the Indians were incidental. Railways were in many ways the chief instrument of European imperial expansion in the late nineteenth and early twentieth centuries. The bulk of the capital flowing from Britain into India went to finance Railways that gave British imperialists the means to extend their authority beyond the coastal fringes of undeveloped India. India alone among the countries with great railway networks is unindustrialized. In the other leading railway powers-particularly the United States, Russia, Germany, though to a lesser extent in sparsely settled areas like Canada and Australia - the railway was the catalyst of the Industrial Revolution. It has had no such effect in India, even though the country's network by 1921 was 56,650 route kms and 61,995 track kms. Railway construction was often bent to suit material interests and in ways that were not conducive to indigenous development. It is the formal imperialism that was decisive in determining the configuration of Railways in India. In his famous quote, Lord Dalhousie, Governor General of India from 1848 to 1856, justified the development of Railways in India “To bring the main Bulk of military strength to bear upon any given point in as many days as it would require now months, and to an extent which at present is physically impossible” (Dalhousie 1853).

In the 1840s, India was governed by the East India Company (EIC), a royally chartered joint stock company founded in 1600. The Government of India (GOI), under the Governor General in Council, was headquartered at Calcutta. The Governor General reported to the court of directors of the EIC in London via the powerful London-based India Office secretariat. The court, in turn, was subjected to the parliamentary Board of Control, whose chairman, an important politician and member of one of the houses of British parliament, was a member of the cabinet of the day. Through these links, the Indian issues were reported to the British Parliament, which had final authority over many matters, including railway development. Besides, railway ventures for India had to be negotiated through a variety of regulatory regimes and interest groups, with different and sometimes conflicting agendas. Discussion of the desirability of the introduction of railed, steam locomotion to the Indian subcontinent started in the 1830s. Preliminary discussion of railways for India soon turned to more serious analysis that examined many issues: how the railways might be financed, the benefits that might accrue to India and to Britain, difficulties that might be encountered, etc. 

3. Scope of Article and Theoretical Considerations

The study is qualitative and uses references to written records of historical events. Histories of early rail companies provided detailed insights into how the railways developed during the period of interest. The paper is based on the recognition of the fact that history is a strategic resource and, if utilized properly, it can be strategically advantageous to an organization (Fleet and Wren, 2005), especially in the process of capability development, due to the following attributes of capability development:

i. It is path-dependent. Its history constrains its future behavior.

ii. It tends to be subject to long time lags.

iii. Embeddedness of capabilities in organizations can convert them into rigidities or sources of inertia, particularly when attempts are being made to create new non-traditional capabilities.

The main objective of this narrative is to examine the capability development of attracting private investment in a highly capital-intensive public utility having long gestation, i.e., railways, in the context of Infrastructure projects, its response to cope with the dynamic environment and resource configurations that lead to new capability developments. The paper is exploratory in scope, sketching out a field of enquiry and empirical in approach. It connects the past in a historical narrative, creating a valuable resource for the managers to look into the resource configurations and capability development of the past to bring coherence in the present. Patterns of interlocked events converge to produce a shared state of affairs. This narrative is expected to build identity, create culture, promote legitimacy, and generate authenticity (Foster et.al. 2017). Under ideal conditions (when market information is perfect and investors are risk-neutral), all projects will yield returns equal to the cost of capital. But when there is information asymmetry, some projects will not be financed, and government guarantees will come into play, which simultaneously weakens the incentive for investors to monitor management performance. Thus, the theoretical foundation of the paper lies in the Modigliani-Miller Theorem and the Principal-Agent Theorem (Jensen and Meckling 1976).

3.1 Promotion and Initial Decisions to Build Railways (1840-1853)

The decision to build railways in India came from London in the 1840s. Till the 1920s, the basic policies and ultimate management of the Indian railways were issued from London. Unless the fact of India's colonial dependence upon Britain is kept clearly in mind, the pattern of India's railway development cannot be understood. 

The British built India’s railways in order to intermesh the economies of the two countries. Simultaneously, they aimed to guarantee British political and military control of the huge dependency. The building of India’s railways was an operation on a monumental scale. The new railways tied the different parts of India together more closely than ever before. They provided a foundation for modern nationalism and for a new kind of middle class of merchants, journalists, lawyers, and other professionals, all shot through with this nationalism. This new middle class became the chief agency through which the Indian Empire eventually met its end. Thus, Indian Railways served the desired outcome expected from it by its colonial rulers.

The promoters and potential investors have some advantages, as they were almost entirely British. Indian Railway ventures were launched within a regulatory context controlled and largely populated by Britons, according to laws, rules, and procedures established by the British. In the 1840s, India was a British colony, and the Indians had little say in Railway promotion and development.

By 1914, British-based markets had some 1.5 billion British pounds invested in railway capital throughout the world. This made up 40.68 percent of Britain’s total capital investment overseas, which reached 3.8 billion British pounds in the same year. In the same year, British investment in railways in India was 140.8 million pounds, which is 9.2% of total railway investment done by Britain. But India produced the annual interest of 4.8 million pounds in 1905 and 1906. 

The key groups whose pressure led to the launching of modern railways in India were the great English and Scottish mercantile houses trading with the East and the smaller British merchant firms in the Indian port towns with which they were in correspondence. To these groups, India’s potentialities as a source of raw materials and as a market for British manufactures appeared limitless. At a time when Britain itself was passing through its own “railway mania,” the solution that suggested itself was obvious: India had to be covered with a network of steam railways that would link the heart of the country with the main stream of world commerce, i.e., in those early Victorian days, with British commerce. In India, railway was built as colonial projects directed by railroad companies, headquartered in London, following a template established by the colonial authorities. The interested parties were mainly: i) Investors, ii) Politicians, iii) Members of the board of directors in private companies in Britain, iv) administrators in India and Britain, v) Supervising engineers, vi) Contractors and their agents.  Some mention should be made of the role which Indian businessmen played in the early years, both in Calcutta and in Bombay. Some Indian merchants took an interest in the founding of railways. The most prominent of these was a remarkable Bengali merchant, Dwarkanath Tagore, grandfather of the poet Rabindranath Tagore. Dwarkanath's firm, Carr, Tagore & Co., is reported to have offered in 1844 to raise one-third of the capital required for a railway from Calcutta northwest to the coalfields above Burdwan. After Dwarkanath's premature death a few years later, the other Indian businessmen played only a passive role; they walked in the shadows of the vigorous British merchants and railway promoters. The conception, promotion, and launching of India's railways were all British.

The promotion of railways in India can be viewed as one phase of the well-known British pressure consequent upon the Industrial Revolution for greater overseas markets and better sources of raw materials. The promoters were adventurous, determined men, sensitive to Britain's needs and to the (profitable) opportunities in India of satisfying them. They were in touch with Britain's merchants and manufacturers to whom they held out the prospect of vast and opulent India becoming, once opened up by railways, a fabulous supply house of cotton and wheat and a huge consumer of textile and other manufactured products of Britain. At the same time, they understood the administrative and military services that railways could perform. In putting their case to Government officials, they laid emphasis on these prospective functions of the railways.

Committees for the promotion of railways in India sprang up in London, Liverpool, Calcutta, Bombay, and Madras. In the press, in pamphlets, in public gatherings, and shareholders’ meetings, they carried on a protracted controversy with the East India Company and among themselves regarding the auspices under which railways should be undertaken and the terms that would be necessary to attract British capital. Against the cumbersome administrative structure of the old East India Company, the merchants and their manufacturer friends held up the virtues of private enterprise. They dilated upon the invigorating effect that the injection of modern Western private enterprise would have upon India’s semi-inert society. At the same time, they emphasized the magnitude of the risk involved in their proposed undertakings and demanded a governmental guarantee of profit. The East India Company, then in its last years of control in India, found many arguments against this new invasion of its domain. The British Cabinet, which had the final say, was subjected at the decisive moment to heavy pressures, including that of the City of London and other backers of the private railway companies. Finally, in 1849, the promoters, the Cabinet, and the East India Company reached an agreement on terms for the construction of the first two “experimental” railways in India. (One line was to run a short distance from Calcutta in a northwesterly direction toward the Burdwan coal fields (Stephenson 1849- East Indian Railway (EIR)); the other line was to run in a northeasterly direction out of Bombay toward the cotton fields of the Deccan (Chapman 1851- Great Indian Peninsular Railways (GIPR)).

The railway pioneers in London were all for a greater role of the private enterprise railway system in India. They advocated the role of private enterprise as follows (Jenks 1927):

i. Experience has shown that Governments cannot build railways as well as private initiative and private drive can.

ii. The Government of India has failed in the past to attend to public works,

iii. India needs many things besides railways, and can get them only through a “system of associated enterprise.'’ These undertakings are far too great and numerous for Government to enter upon; “the establishment of the Railway system by private enterprise would put the people into possession of a principle of association by which they might all be effected, this is a matter of extreme importance in India, where the energy of individual thought has long been cramped by submission to despotic governments, to irresponsible and venal subordinates, to the ceremonies and priesthood of a highly irrational religion, and a public opinion founded not on investigation, but on traditional usages and observances."

The railway promoters in London demanded a virtual governmental guarantee of the annual dividends to the holders of the railway company shares: if the companies did not make enough profit to pay a dividend, then the EIC would provide money extracted from the people of India via the revenues of the GOI. Initially, EIC was not ready to oblige, but in 1849, GIPR and EIC eventually got their guarantee, a generous 5% return on the capital invested. The standard contract provided that the private companies would raise the funds for the railways and manage their operations, while the GOI would exercise high-level supervision of railway policy and guarantee the private companies against the risk of loss. Thus, the significant presence of the GOI was an important characteristic of Indian Railroad history from the very beginning. GOI had multifarious roles, as i) Guarantor, ii) Partner, iii) Manager, iv) Proprietor, v) Owner. One individual came to serve as “Government Director” on all the individual boards of the guaranteed companies. The supervisory powers of the GOI might not have been as effective as they could have been in the early going, but they were present and became stronger. Thus, interest in Indian railways started with activities commencing in piecemeal fashion during the 1940s but gaining real pace in the late 1850s (Macpherson 1955).

3.2 The Pioneering Decades, Construction and Operation (1850-1871)

This system of rail development in India is known as the old guarantee system in Indian railway history. EIR and GIPR were floated under this system from 1849 to 1851. The document in which these terms were embodied subsequently served as a model based on which other railway companies were formed? (A total of 8 private guaranteed railways were formed Between 1853 to 1871). Between 1845-1875, 95 million pounds were raised from Britain in support of building India’s guaranteed railways (Macpherson 1955) while Daniel Thorner (1951) considers that 80 million pounds of sum were raised by 1968.

These contracts have three key features:

i. Reliance on private enterprise: The capital for these Indian railways was to be raised by private companies incorporated in the United Kingdom. These same private companies undertook to build the railways and to operate them for a period up to ninety-nine years. The Government of India retained the option of purchasing the railways from the private companies after twenty-five years had elapsed. 

ii. State underwriting of the companies against the possibility of loss: - To encourage private British capitalists to invest their money in Indian railways, the Government of India agreed to certain financial obligations which devolved upon the taxpayers of India, not of the United Kingdom. The chief of these obligations, to come into effect upon the opening to traffic of each railway, provided that the Government of India would contribute each year to each railway that failed to earn 5 per cent of the capital invested; that contribution was to be sufficient to enable the companies to pay a 5 per cent dividend; but the contribution was in no case to be larger than 5 per cent of each company’s capital, Should the companies operate at a net loss (in which case the government’s 5 per cent contribution would not be enough to assure them an annual 5 per cent profit), they were conceded the unconditional right to turn back their enterprises at any time to the Government of India. All they had to do was to give the government one year’s notice, at the end of which time they would receive back their capital in full.

iii. Government of India supervision of railway operation and policy:- In return for its aid to the railway companies, the Government of India reserved to itself extensive powers over the railways, i.e., direction of line, type of construction, mode of operation, and rates and fares policy. In point of fact, however, the railway companies in practice could appeal to the British Government against distasteful decisions of the Government of India, and these railway companies, with their headquarters in the City of London, came to constitute a vested interest of great power.

The companies, once the initial contracts with the virtually foolproof clause guaranteeing a 5 per cent annual interest had been signed, were able to raise their capital with ease from the investing public in Britain. Between 1850 and 1854, the construction of the two “experimental lines proceeded without great difficulty. Trial runs on parts of the lines were first undertaken in 1852, and by 1854 both lines were in operation, The Indian Government of the day, headed by the energetic Lord Dalhousie, pressed in 1853 for the early ending of the “experimental’’ period and the undertaking of a network of trunk lines linking the principal areas of the country. Lord Dalhousie’s minutes of April 20, 1953 provided justifications and guidelines for the railway system. A series of contracts were negotiated in 1854 and afterwards, with the EIR, the GIPR. And several new companies, providing for the construction of half a dozen major lines. The basic terms of the new agreements were identical to the original contracts signed in 1849 with EIR and GIPR. By the end of 1871, the growth of privately guaranteed railways is summarized in Table 1

Table 1: Status of Guaranteed Railways in 1871

These lines were to be built to the gauge of 5’6”. Dalhousie’s recommendations were accepted by the authorities in London. He advocated the construction and operation of Indian Railways by private companies “formed in and directed from England” under the general control of GOI. These “private guaranteed companies” overwhelmingly capitalized in Britain built, managed and operated almost all the Indian Railways up to 1871.

To build the railways, the companies hired contractors to undertake particular parts of each line. (Where contractors were not available, or where agreement on suitable terms could not be worked out with them, the companies themselves undertook construction.) Under the terms of the contracts between the railways and the East India Company, these agreements could not go into effect without the approval of the Government of India. The contractors available in India and willing to undertake this work were small men with limited resources. Naturally, they hoped to gain a handsome profit from their labors. By contrast, the government of India was under explicit instructions from the East India Company to keep costs low. A clash was inevitable and soon developed. 

Technically, the Government of India officers deputed to watch over the railways had the right not to sanction expenditure incurred without their approval. The contractors and the railway companies’ men did not want to wait for their operations. In practice, they went ahead, did things, and later told the Government what they had done. The Government had the right to refuse to sanction such expenditures. If this right were insisted upon, construction would have barely creaked along. In the early years, there were repeated clashes between the builders and the government supervisors. When the Indian Rebellion broke out in 1857, only 480 km of railways were in operation. Had more railways been open, the Government would have had a much less difficult time in reasserting its authority. When the British Parliament ordered an inquiry into the progress of railway construction in India, the first of what later turned out to be a long series of Parliamentary and governmental inquiries into the functioning of India's railways, the railway companies had the opportunity for which they were looking.

They painted a black picture of the government harassment to which they had allegedly been subjected. The Parliamentary Committee hearkened to the companies and rebuked the Government of India. The result was that after 1858, the costs incurred in the process of railway construction were checked only by a post-audit system. The way was open for much more rapid but much more expensive, if not extravagant, progress. The year 1858 witnessed the removal of yet another fetter on the operation of the private railways, namely, the East India Company itself. As part of the aftermath of the Great Indian Rebellion of 1857-58, Parliament abolished the East India Company and transferred control over India to a new member of the British Cabinet, the Secretary of State for India.

With longer sections to be built and with a greater emphasis upon speed rather than economy, Indian railway building became attractive to the great British engineers and builders, such as the famous house of Brassey. Contractors like these were willing to operate abroad, but only with wide margins of profit. The 1860s became boom years for British contractors, builders, engineers, and suppliers of materials to India. Leland H. Jenks estimates that between 1857 and 1869, about £150 million of British capital was invested in India, principally in railways. So much British capital flowed out to India those British farmers and domestic businesses at times complained that money for their own needs was obtainable only at unusually high rates of interest.

The same capital flow placed very heavy burdens upon the limited financial resources of the Government of India. Under the guaranteed interest railway contracts, the Government of India was obligated to make contributions to those railways whose operations did not result in net earnings per year of 5 percent; only one of the new railways, the great E.I.R.’s line from Calcutta to Delhi, paid its way right from the beginning. All the other railways required and secured state aid. The Governor General and his advisers saw a prospect before them of endless demands for state support from the rapidly expanding railways. As they saw it, the companies were relying more and more upon state aid rather than upon energetic and efficient conduct of the railways.

Initially, the costs of construction of the railways were very high, since the companies had a guarantee of 5 per cent interest, they had little incentive to economize. Building went ahead both carelessly and lavishly, where works were defective, they were simply rebuilt. Stations were erected in a grand style, scarcely suited to India’s impoverished economy. From the beginning, luxury coaches were provided for upper-class passengers. Except for the E.I.R. from Calcutta to Delhi, the railways for many decades did not pay their way. For two generations after 1850, the railways, instead of contributing to government revenues, acted as a drain on government finances.

In general, it is not too much to say that, except for the shareholders, virtually no one acquainted with railway matters has been pleased with the way they have functioned. From a comparative point of view, this public attitude toward railways may not be a novelty, but the grounds for it in India seem to have been somewhat different from those which have operated elsewhere. Chief among these grounds, in addition to the question of unprofitability were the poor quality of the freight service, rates and fares policy, the failure to develop industries in India capable of supplying the country’s needs for railway equipment and stores, the exclusion of Indians from executive posts on railways and the fact that right down to our day vast areas of the country have been left without any railway service whatsoever.

These persistent basic difficulties were so great that they provoked a major governmental inquiry into Indian railway affairs. The theme around which these inquiries centered was whether private ownership and private management of the railways was the form of organization best suited to Indian conditions, or whether some alternative type of organization would prove financially more remunerative to the Government of India and also render greater service to India’s economic needs. The Government of India sought at that time to end the entire guarantee system by buying out the private companies and inaugurating a policy of thorough-going state ownership and operation.

3.3 State Construction and Ownership (1869-1882)

The engineers in the service of the Government of India insisted that they could build and operate railways more cheaply than, and at least as efficiently as, the state-guaranteed private companies. The Government of India told London that India could not possibly stand up to the burdens which were then being piled rapidly upon her financial resources. Under repeated pressure from the Indian authorities, two historic decisions were taken in London in 1869-70:

i. Any additional railways in India would be built and operated by the Government; 

ii. The contracts with the older companies would be revised.

To the great disappointment of the Government of India, the revised agreements which the Secretary of State for India negotiated in London with all the older railways (except the E.I.R.) gave the companies a new lease of life and terms even more favorable to them than before. This was done with the express hope of stimulating the companies to become more genuine and more effective enterprises. In London, however, the Secretary of State for India was unwilling. He supported the Government of India only to the extent of agreeing that new railways from 1870 onward were to be state-built and state-operated. For the decade from 1870 to 1880, the second phase of railway development, the two types of organization functioned side by side: on the one hand, the older private companies owned and operated the trunk lines; on the other hand, new auxiliary lines, built and run by the Government of India, came into operation. The latter started auspiciously. The state lines were as well built as the private lines, and they were as well run. Their costs of construction costs were much lower than those of the private companies. Despite this good showing, the first large trial of state operation soon foundered on the rocks of public finance. To build, own, and operate railways, the Government of India needed to raise large sums of capital. But just at this time, several large new financial burdens pressed upon the Government of India. In the first place, the worst series of famines afflicted great parts of the country in the 1870s, which necessitated large expenditures. The external policy of the new Governor General, Lord Lytton- sent out by the Disraeli Cabinet after the Conservative party’s victory at the British elections in 1874 – led the Government of India to get itself involved in an unprofitable and expensive war with Afghanistan. Famine and war drained the Government of India’s finances. Opponents of state railway operation took advantage of these difficulties to argue that the government could not be depended on to raise money for railways as this was not a proper sphere for governmental activity, and in any case private enterprise could do a better job. As support for these arguments, they cited the case of the East Indian Railway. Here was India’s first, most important, and most profitable railway, flourishing under private operation. Its directors and shareholders, for reasons that we cannot go into here, had refused to go along with the other railways when their contracts were renegotiated in 1869. Under the terms of the original contract between the Government of India and the East Indian Railway, however, the government had the option in 1879(after 25 years of operations) of taking over the line. The decisive question in the late 1870s, then, was which type of policy would prevail in this crucial case. A new contract was signed in 1879, which embodied a compromise between the Government of India and the backers of “private enterprise”; in it, the advantage lay with the latter. Shortly thereafter, the Secretary of State for India instructed the government to bring to an end its trial of state operation, except on military lines.

3.4 Modified Guarantee System (1882-1924)

These instructions, together with the new East Indian Railway contract, inaugurated the third period in the railway development of India, the period of the modified guaranteed-interest system, 1880- 1924. In the broadest terms, this contract of 1879 signified a change from private ownership and private management to overwhelmingly public ownership combined with a peculiar type of private management that was subject, especially in matters of railway financing, to great governmental restraint. The original East Indian Railway Company was purchased by the state, and 80 per cent of its shareholders were bought out, principally by annuities. Under the new contract the remaining 20 per cent of the shareholders in the original East Indian Railway who were not bought out formed a new company. They kept the old name of the railway and contracted to manage the undertaking. For this, they were guaranteed, out of the revenues of India, 4 per cent on their capital. Should surplus profits remain in any year after working expenses, annuity sinking-fund payments, and interest on loan capital, and so forth, had been met the private owners of stock in the “new” undertaking would share in these surplus profits. Since the state was now the principal owner of the railway, the lion’s share of such surplus profits would naturally go to it. The private companies retained in their own hands the control of the most significant aspect of railway operation, the setting of rates and fares. By and large, they also continued to exercise the right to purchase equipment where they pleased and to staff the lines with whom they pleased.

This 1879 contract with the East Indian Railway provided a rough model that the government followed in dealing with the other main lines of India as their first twenty-five-year period came to an end and the government had the right to buy them out. It is not surprising that under the revised and renewed contracts there was little impetus to efficient operation. After all, the private shareholders were guaranteed their 4 per cent. If any surplus profits did accrue, the overwhelming bulk was bound to go to the state. So, the managers of these undertakings did not tax themselves unduly. Their jobs were well-paying; they were important figures in the India of their day, controlling the inland transport of the country and wielding the considerable economic power that went with such control. But the new arrangements proved no more satisfactory than the old, except in one very important respect. From about 1900, the railways began to earn their 4 per cent dividends per year. They no longer served as a net drain on the government's resources.

The same basic guaranteed interest railway contracts that had led the railway companies to be casual about their costs of construction also encouraged them to be nonchalant about their traffic. Why should the companies exert themselves to secure the maximum passenger or freight traffic when, even if their earnings were low, the guaranteed interest would raise their dividends to 4 or 5 per cent? Instead of trying to call forth the largest possible volume of freight and passenger traffic, the railways contented themselves with a relatively high rate and high fares policy. Although, in comparison with England the rates and fares in India seemed much lower, the fact was that, taking into consideration relative costs in India and England, the Indian rates and fares were high, The Government of India tried long and hard, but never quite succeeded in persuading the railways that rock-bottom rates would greatly increase the total volume of traffic and swell the companies’ total revenue income and net profits. By 1915, some of the Indian rail lines were having low capitalization, the major reason being their inability to perform like a conventional integrated railway, rather than just operating companies, as their infrastructure had been purchased by the Indian government.

Two other aspects of the companies’ rate policies are relevant here. Like railways in other parts of the world, the companies quoted reduced rates for the carriage of long-haul bulk goods, particularly from the terminus to the deep interior or vice versa. The headquarters of most of the major lines were in the great port towns: Calcutta, Bombay, and Madras. In the Indian context, this meant that exports from the interior of India sent by rail to the coastal towns for shipment to India's biggest customer, the United Kingdom, were charged these low rates; similarly, with imports from the United Kingdom to the Indian interior. What was a railway practice throughout the world, operated in India to deepen the country’s economic dependence on the United Kingdom? A related rates practice that benefited Britain more than India stemmed from the fact that each company operated its system as a little empire of its own. Rates were quoted only within that system. There were no through rates involving two or more systems. To keep traffic within their systems, some of the companies charged especially high rates on traffic movement over the sections of their lines linking up with other systems. Such compartmentalization did not conduce to the emergence of an integrated Indian economy.

As the railways were a British show, controlled by companies situated in London, their officers and top personnel were overwhelmingly British. The companies were not interested in training Indians for the higher positions, nor were they in giving them advanced technical training. India remained for many decades in the anomalous position of having the largest railway system in Asia, with virtually no Indians in posts of real responsibility. The Britons who ran India’s railways were, of course, used to British equipment and supplies. In maintaining and expanding the network, they placed their orders in England. They did this not just for items available only in England, but also, right down to the 1920s, for items that were, or could well be, made in India. This “Buy British” policy withheld from India an impetus to industrial development that proved quite effective in other countries.

The unsatisfactory role of the railways in India’s economic evolution is by no means to be attributed exclusively to the policies of the private companies. A good deal of the responsibility lies with the Government. It was the Government of India which, with the approval of the East India Company, decided upon the 5'6" gauge as the basic one for India’s main lines. To build, equip, and operate lines with so broad a gauge was a much more expensive operation than those on a gauge of 4'81/2" (now standard in most of Europe and America), not to mention the meter gauge, 3' 3(3/8)", which is also widespread. This difference became apparent to the Government of India, and by the 1870s, it succeeded in having some meter gauge lines built in India. This led to a famous “Battle of the Gauges," which was bitterly fought within the Government of India and between the Government of India and the British Government in London. British military authorities made it plain that for India's main lines running from such seaports as Karachi, Bombay, and Calcutta to India's northern borders, particularly to the historic Northwest Frontier, they were determined to have only broad-gauge lines. Some civil and fiscal sections of the Government of India were just as insistent that India could not afford such expensive lines. The military won the main argument, but the other camp got sanction to build meter gauge lines as supplements to the chief systems.

India, in this way, came to possess two main gauges, the 5'6" and the 3’3(3/8"), with all the disadvantages that such a break of gauge implies. The governmental responsibility in this expensive fiasco was heavy. And that is not the end of the story, Meter gauge lines were built in northern, eastern, and western India; Also, extensively in the Deep South and to a Limited extent in Central India and the Bombay Deccan. Yet no link was provided between the various meter gauge systems of peninsular and southern India, on the one hand, and those of the more northerly areas. Thus, in times of unusual demands for equipment, or wartime, there was no economical way of shifting meter gauge equipment from the northerly set of systems to the southerly, or vice versa. Here again, the governmental responsibility was heavy. Railway men, by and large, are unsympathetic to roads. Highways take traffic away from the railways. Whether the Indian railways were being managed by companies, as after 1924, by the Government, the railway heads looked with disfavor upon competition from passenger buses and freight trucks, and acted to oppose their development. In a sense, therefore, the state-owned railways are open to the charge of having helped stunt the growth of a road network in India.

More important for our purposes is the question whether governmental policies may not have impeded the development and efficient functioning of the railways themselves, Between 1880 and 1914 neither the Government of India nor the Secretary of State in London seemed to know just what they wanted to do with a number of the railways, particularly the lesser lines, The forms of railway-owning and railway-managing agencies became so varied that a standard British authority on India was provoked to comment: “To sell a railway one day and buy another the next, to build a railway and then lease it to a company, and at the same time to take over another lease line, these inconsequential proceedings are sufficient indication of the total want of a systematic policy and good judgment which has characterized the railway administration of the Indian Government." 

During the same period, the financial policy of the Government toward the chief railways was harmful. The initial extravagance of the companies about construction and subsequent questionable procedures regarding their capital costs, had had an important effect on the contract of 1879 with the E.LR. (and later contracts of the same type with other companies}: the expenditure of the railways on repairs, renewals, extensions, and development was placed under the control of the Finance Department of the Government of India. The primary duty of that Department, however, was to balance the Government’s budget. Often, the most convenient way of doing this was by taking a greater share of the railways’ receipts. In the process, the railways’ appropriations for maintenance and improvement would be reduced. By the early twentieth century, in consequence, the railways came to suffer from serious undercapitalization. The existing lines did not provide sufficient service to move the traffic that presented itself. Chronic congestion became normal. 

As Indian political opinion developed, the nationalists castigated the railways as foreign bodies with headquarters in London, operating under British direction and primarily in British interests. During World War I, the railways proved quite inadequate to the tasks which faced them. In the face of the severe wartime shipping shortage, the railways were called upon to move much traffic that had previously been handled by coastal shipping. Far from bearing this and other wartime burdens, the railways nearly suffered a collapse. The war was followed by a vast wave of intensified nationalism, culminating in the first civil disobedience campaign of 1920-22, led by Gandhiji under the banner of the Indian National Congress. In the face of massive public resentment, the railways could no longer be kept in the hands of private interests, which were both pampered and foreign.

In 1920, the British authorities (Secretary of State) appointed the most important of the many commissions of inquiry which have studied India’s railway problems, i.e., the Acworth committee in 1920-21, to enquire into the administration and working of Indian railways. The majority report of this committee, signed by Sir William Acworth, the outstanding British railway economist of the period, and well-known for his prepossessions in favor of private management of railways, recommended complete state ownership and state management of India's Railways. 

The five members of the Acworth Committee (2 members were British, 2 members were Indian, and William Acworth was Chairman), who were in favor of the continuance of some form of private management, also conceded that public opinion was against them. The public, they stated, favored state management because it believed that company management based on boards of directors in London “does not encourage the development of indigenous industries by sufficiently favorable treatment; that it gives preferential treatment to import and export goods; that under the present system of company management large profits are made by British interests; and that hitherto the companies have not employed Indians in higher appointments except to a very limited extent, and have not granted them adequate facilities for technical training. The committee unanimously recommended the termination, when opportune, of the contracts with the private companies headquartered in England. In a divided vote, the majority of the committee additionally recommended that most Railways in India should be state-managed. A minority recommended that the private companies located in India could still have a role in delivering rail services to Indians.

Nationalism had stirred among South Asians during the first quarter of the 20th century, facilitated by the increased mobility railway made possible. British colonial authority remained a force to be reckoned with, but slowly, the nationalists and their agendas moved the history of India and its railway along new lines. If India before World War I was ultimately a despotic foreign regime dependent upon the military power, then by 1918, the initiative had moved to Indians who would more effectively accord the support that Britain required on terms of their own. Nationalists tried to make the Railways more Indian and more responsive to Indian problems, wants, and aspirations. Though the nationalization had made a tentative beginning in 1869 with the inception of metre gauge state railways, and made a big step into broad gauge operations with the state purchase of the EIR in 1879, followed by a step backward when private EIR continued as the operator of the line. 

Table 2: Status of Indian Railways as on 31.03.1923

With the pressure from nationalists, the advocates of state-managed railways prevailed, and the committee, though initially predisposed in favour of the private enterprise role, recommended that the state should manage directly the railways which it already owns. The Government of India in 1924 implemented the Acworth Report. The Government bought out the E.I.R. and placed it under complete state ownership and state management. Thereafter, the Government took similar action with every other important line and did not renew the contracts with the private companies at their expiry dates. Today, a unitary state-owned system (managed at its apex by the Railway Board) manages India’s railways are all state-owned and state-operated.

Very belatedly, therefore, the original proponents of state management, the Government of India officials, whose pressure in the 1850s and 1860s for state enterprise had led to the Government construction and operation phase of the 1870’s 1870s-were vindicated in the 1920s. Under state control, Indians themselves were gradually given more responsible positions. The “Buy British” policy was modified in favor of getting more railway items “Made in India.’ Rate policies were revised. These and related changes had to take place in a difficult setting.  On 31 March 1923, the total route km of railways in India stood at 60,540 km, of which more than two-thirds was owned by the GOI, its subordinate agencies, and the Indian states, but most of it was managed by companies. Only three principal railways, namely the North Western, Eastern Bengal and Oudh, and Rohilkhand, were under the direct management and control of the Government, the remaining being worked by the companies.

4. Conclusion

Financially, the railways represent the greatest single injection of British capital into India’s economy. In the early decades of railway-building, practically all of the capital came from Britain. Out of the first £86 million invested between 1849 and 1869, less than one per cent was subscribed in India. In the 1870s, when the Government of India itself built railways, the position became more complex. A large part of the money which the Government then obtained for railway purposes came from borrowing in London. Simultaneously, the private companies continued to raise money in London. When state management as a basic policy was abandoned in 1879-80, the position became even more complicated. On older lines, like the E.I.R. and the G.I.P.R., most of the shareholders were bought out with annuities. Some, however, obtained compensation in Government of India stock payable in sterling; simultaneously, additional new private companies were formed in London and received contracts to undertake to build and operate new lines in India. They raised their capital in Britain. Parallel with this activity, the Government of India itself built military railways and famine-prevention railways. It obtained the money for these lines both by borrowing in London (in sterling) and in India (in rupees). This multi-form activity has made it difficult to trace the character and volume of British railway investment in India. We are safe in asserting, however, that out of a total capital investment of £236 million in railways by 1902, the great bulk was of British origin.

In short, India's railway development is massive, but not of the proportions that would be required by a country whose economy had been modernized. Nonetheless, nothing else in India's history has more profoundly affected the country's economic life than Railways. The steel of the railways, it has been said, pierced the older India to the heart, and the blood ran out. Millions of artisans in villages and towns found that they could not compete with British-manufactured goods, the import of which was greatly facilitated by the new railways. These same rail lines, by providing access to the ports and thereby to overseas markets, made possible & great increase in the export of foodstuffs and industrial crops. The reserves of the peasantry were depleted, and in the bad years of the 1870s and 1890’s devastating famines followed. As against these and related hardships, there were certain compensating advantages. The railways conferred on the British administration an unprecedented power, and thus brought about an era of peace and, relatively speaking, law and order.

The rapidly swelling volume of foreign trade brought new consumer goods to the countryside: matches, kerosene, lanterns, utensils, and implements. Increasing exports of agricultural items gave the peasantry funds with which to satisfy their newly kindled wants. Simultaneously, there occurred a great increase in coal mining; new ventures were launched for the extraction of mica and manganese. India's port cities became crowded with new traffic brought down by the railways. Modern cotton and jute spinning and weaving mills sprang up. An engineering industry came into being. By the early twentieth century, the foundations for an iron and steel industry were being laid. Vegetable oil mills, paper mills, and sugar mills followed. The details of these and related economic developments are available in the standard handbooks of India’s modern economic history.

But this industrial development, which the railways did so much to make possible, has to be seen in proper perspective. The number of those gainfully employed in factory industries never amounted to 1 per cent of the Indian population. India has remained an overwhelmingly agricultural country, and her agriculture continues to be carried on, by and large, in the same old way. The basic mode of cultivating the soil, the tools, and working methods remain fundamentally unaltered. Meanwhile, the total population increased during this period by approximately 100 million. It is doubtful whether real output increased to so great a degree. Grounds exist, therefore, for suspecting whether there has been any increase at all in per capita national income. It is not inconceivable that there has been a fall.

The political and economic strategies adopted by the colonial powers are:

(a) Increase in military efficiency.

(b) Development of an extra-legal consular and fighting corps.

(c) Furnishing of supplies for construction and otherwise helping in the investment of capital.

(d) Employment of the British in the construction and operation work, and generally opening out new avenues of services for them.

(e) Granting rates directly or indirectly preferential to British trade and industry,

(f) Making railway alignments to suit the development of a particular course of trade in which Great Britain was interested.

These strategies were not out of sight for Lord Dalhousie when he advocated the development of Railways with great vigour in India. But by the close of the 19th century, the advantages the railways brought to India overshadowed these strategies. After the First World War, it may be stated generally that, partly as a result of the vigilance of the Legislature and partly as a consequence of an enlightened recognition of the best interests of India by Government, considerable improvements have been effected both in the policy as well as in the working of Indian Railways.

Having said this, it may seem paradoxical to go on to say that the Indian railways probably would have contributed more to India's indigenous economic development had they been a state enterprise. The deficiencies in the functioning of the "semi-private’’ enterprise have already been indicated above. By contrast, the experiment from 1870 to 1880 with the state construction and state operation was quite promising. The private railway companies had to mobilize their full strength to bring that experiment to an early termination, lest its results prove too damaging. It is certainly not the idea to suggest by this line of argument that under a state enterprise, everything would have been better. There is plenty of evidence against such a presumption; but, on balance, state enterprise might well have been a lesser evil than the kind of “private’’ enterprise whose functioning we have sketched.

Under the modified guaranteed arrangements, India's railways had the worst of both worlds. They had neither private enterprise nor state enterprise. Risk-free private companies with headquarters in London but subject to a variety of controls and directions by the Government of India represented an odd form of private enterprise. A government that could arbitrarily control the capital budget of the railways but could not shape the railways’ revenue policy or their management practices represented a strange form of state guidance.

5. Discussion

One of the world's great railway systems was built up in India during the period of British rule. Its operations, however, were oriented toward the satisfaction of British interests rather than those of India. After all, the prime concern of British railway policy was to make India useful to Britain, not to make Britain useful to India. The secondary consequences for India of the introduction of railways were far fewer than they might have been. A lack of government participation in setting up the railways resulted in a slow reaction in terms of providing legislation to regulate the development and running of the railways. It would appear that the very economic changes which the railways made possible in India were retarded by how the railways were built and the way they were run. A different type of railway policy might have brought India much further along the path of modernization. 

It is only today, after 70 years of independence from British rule that Indian Railways is being run as a wholly state-owned enterprise. It has been reorganized on a geographical basis into 17 major systems and is showing signs of getting on its own feet. Even so, the Indian Railways cannot handle the country’s passenger and freight traffic because of arrears in infrastructure. Since the state enterprise of 70 years cannot develop the infrastructure commensurate with the country’s need, the Indian railways is again envisaging the use of private capital by developing non-governmental railways.

6. Lessons for Leadership 

Construction of Railways by British railway companies is perhaps the foremost example of using free-standing company to build infrastructure. These companies were registered and controlled from Britain, but their operations were in India. They constituted an important component of British FDI Perhaps the most significant conclusion of this study is that private capital showed no aversion to overseas public utility construction provided that the principal and interest were duly guaranteed. Since the Government could not raise the resources for the desired pace of rail development in India, Indian Railways of today is adopting the other alternative to induce private companies, both Indian and Foreign, to undertake the works, while retaining a large measure of state control. It is the type of inducements given to these companies that will decide whether the rail development will give impetus to India’s economic development or otherwise. The present study has demonstrated how a “great” railway network can coexist with a “backward” economy, as the network created during the British period was great primarily in its length and was “underdeveloped” in many other basic respects.  

The failings noticed in Indian railway infrastructure creation require the following policy initiatives:

i. Refreshing institutions and policies for channelizing financing. Government agencies should be responsible for monitoring the efficiency and performance of the enterprise and should be backed by a credible threat of sanctions against the managers who are tempted to enrich themselves.

ii. Providing a stable, durable, and empowering ecosystem for private players to partner with government entities. This will relieve the government of the need to provide subsidies and interest guarantees. This will also address the twin challenges of risk avoidance by the public entity and rent seeking by the private partner.

iii. Infrastructure projects are capital-intensive ventures with a long gestation period, which initially drain the government's resources and do not yield desired outcomes expeditiously, as a private enterprise desires. Hence, such capital-intensive projects must remain under continuous monitoring by the Government/ its regulator.  

A firm set up in one country to do business outside that country. 

Notes

1. Route Kilometre is the distance between two points on the Railway, irrespective of the number of lines connecting them, whether single line, double line, etc. 

2. Running Track Kilometre is the length of all running tracks, excluding tracks in sidings, yards, and crossings.

3. John Hurd, India Railway History 2012

4. Feis, H. Europe the world Banker, 1870-1914(New York, 1965), 27.

5. Fieldhouse, D.K., Economics and Empire, 1830-1914 (London 1984), 56 Table 5.

6. Paish, Great Britain Capital Investment, 468.

7. Leland H. Jenks, Migration of British capital to 1875, Ch VII.

8. Daniel Thorner, Investment in empire: British Railway and Steam shipping Enterprise in India, 1825-1849, Ch. VII.

9. Minutes by Lord Dalhousie to the Court of Directors, 20 April 1853.

10. Stuart Sweeney. Indian Railroading: Floating Railway companies in the late nineteenth Century.

11. Daniel Thorner, Great Britain and the development of Indian Railways, 389-402.

12. N Sanyal, Development of Indian Railways, 371

References

1. Ambirajan, S., 1978. Classical Political Economy and British Policy in India, Cambridge.

2. Anon, 1884. Indian Railway: an argument for a government monopoly in preference to private enterprise. Calcutta.

3. Ayer, J., 1905.  A Century of Finance, 1804-1904.

4. Anita, F.P.,1932. Inland Tran Show Less