RAILWAYS

RAILWAYS IN BRITAIN

GENERAL

1. Robert Luis Stevenson developed an operational steam locomotive in 1829.

2. Around the same time iron rails replaced wooden rails.

3. Rapid railway construction began in the 1830s.

RAILWAYS AND INDUSTRIALIZATION IN BRITAIN

1. Initially the railways were developed to connect coal mines with the canals and with

manufacturing towns.

2. The rapid expansion of railways greatly aided acceleration of Industrial Revolution

in Britain.

3. Industries such as coal, iron and steel, and machine making grew rapidly after the

coming of railways.

4. The geographical areas, through which the railways passed when it connected the
industrial production centers with their raw materials (some of which were also

used by railways) production centres and their major markets, also experienced

increased economic activity.

5. These horizontal and vertical linkages made the railways a leading sector in Britain

during the 2nd quarter of the 19th century.

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 RAILWAYS IN INDIA

1. Railways came to India barely 25 years after it came to Britain – a very small time

lag.

2. Railways came to India in 1853 when Bombay-Thana line became operational.

3. From this first line, that covered just 34 km, Indian railways had become the 4th

largest system in the world by 1910 – merely 57 years later.

4. By 1947, 78% of India fell within the range of the railway system.

5. However, unlike in Britain, the railways in India failed to become the leading
economic sector.

6. It failed to provide any major impetus to the modern industry in particular and

economic development in general, in India.

7. The linkage effect that was seen in Britain was greatly dampened in India by

a. the geographical pattern of the railways development and

b. the structure of freight rates.

GEOGRAPHICAL PATTERN AND FINANCIAL ASPECTS

1. Railways, no doubt, contributed to the modernization of the economy, particularly

through the areas it passed, but it was an uneven and lopsided modernization

based, as it was, more on X (Export) and M (Import) trade than an internal trade.

2. The geographical expansion of railways was much more on the trunk lines linking

ports with the interior than linking interior regions themselves.

3. The railways helped foreign enterprises in India and investors in Britain more than
Indian enterprises or investors.

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4. The dampened multiplier and linkage effects of the railways investment – the

largest consolidated investment in pre Independence India – meant that even in

purely financial terms, the railways were not very profitable for the Indian economy
for much of the period under consideration.

5. The pattern of ownership and construction in particular failed to generate any

economic development in India as they had done in Britain.

6. However, the railways, albeit on a limited extent did

a. promote some growth of even internal trade and manufacturing in India

and

b. did somewhat mitigate some of the worst effects of famine, as well as,

c. contribute to the equalizing of prices of foodgrains in some parts of the

country.

d. encouraged regional specialization in many areas, although quite unevenly

and in a lopsided manner.

7. For all its shortcomings, compared to its predecessors, railway indeed was the
fastest and the cheapest transport available in the country.

PRE-RAILWAYS TRANSPORT

1. Prior to the introduction of railways, transportation, except in the Indus and Ganga

river valleys and the coastal regions, was costly and slow.

2. Cost of transport of most goods were very high and only the high value low volume
goods justified carrying them over long distances.

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 a. The conditions, including spoilage and chances of robbery on the highways,

limited the size of the markets.

b. Under the conditions, regional rather than national market was more
relevant.

c. This restricted the size of most manufacturing enterprises.

3. However, there were some notable exceptions such as

a. textiles, food grown in river valleys (and thus amenable to transport) and

b. goods produced in coastal areas (with access to sea transport).

4. Coming of railways should have changed this scenario as it offered possibility of

reduced transport cost, faster transport (important for perishables).

5. According to an estimate by John Hurd, compared to the alternate cheapest

transport,

a. railways would have saved approximately 9% of National Income in 1900,

suggesting that coming of railways would have bought considerable savings

to the economy.

b. Even on the unprofitable lines, where the railways consistently earned less
than 5% profits, there would have been a saving of approximately 4% of the

National Income.

c. It must, however, be kept in mind that these estimates are counterfactuals

and based on lot of assumptions, e.g. we do not know how the domestic
transport and transportation costs would have changed in the absence of

railways.

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 REASONS FOR THE DEVELOPMENT OF RAILWAYS IN INDIA

1. According to Dalhousie, governor-general of India in 1853, the railways in India

were to serve –

a. The Military Purpose – Enabling a swift dispatch of troops against internal

as well as external aggression.

b. Social and Commercial purpose – Dalhousie told the court of directors that

there are

‘beyond present calculation great tracts are teeming with produce they cannot dispose
off. Others are scantily bearing what they would carry in abundance if only it could be
conveyed wither it is needed. Every increase of facilities for trade has been attended
as we have seen with an increased demand for articles of European produce in the
most distant part of India.’

2. In other words railways were to -

a. Aid in the rule and protection of the Raj by rapid transportation of troops

and,

b. Facilitate in developing a market of British goods in India and procurement

of raw material from India.

PROCESS OF RAILWAY DEVELOPMENT IN INDIA – THE GUARANTEE SYSTEM

1. In Britain private companies ran the railways system, supervised and controlled as

well as helped by the government with concessional land grants to build the tracks

on.

2. In India, too, Dalhousie favoured a similar system as he argued that a private

agency under the supervision and control of government was a better bet than

railways being built by the government for the following reasons –

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3. Withdrawal from duty of a large number of government officials for building

railways would be against public interest

1. Conduct of commercial undertakings is no part of the proper business of

the government.

2. Hence, railway construction could be better carried out by English Engineers

and better financed from Lombart Street (the financial centre of London).

4. However, given the “unknown factor” (India) no British firm came forward to invest
in the Indian railways.

5. The Govt. of India (GOI) then offered ‘the guarantee’ of 5% return on capital

invested for a period of 99 years if the company running the railways could not

attain this minimum rate of return commercially.

6. Other important features of “ the guarantee” system were –

1. Interest was to be paid from the date the Capital was subscribed at a fixed

exchange rate (Re 1 = 1s 2d)

2. Land was provided free of cost by the state.

3. The government retained the right to share revenue with the companies if
profit was made over and above the guaranteed minimum.

4. The government had the option of purchasing the line after the 1st,,25th, 50th

or 75th year.

5. The companies also had an option of surrendering their lines after

completion on giving 6 month notice and the government was then bound

to refund the sanctioned outlay.

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 6. Government were empowered to take over the lines if the companies failed

to find the required capital.

7. Once the net receivables of the companies (from freights and other
chargeables) exceeded 10% of the total outlay government could control

the tariffs charged by the railways.

7. The Indian railways development journey may be categorised under 4 phases –

1. Phase 1: The period of guaranteed companies (1846-1869)

2. Phase II: Period of direct state construction and management (1869-1882)

3. Phase III: Period of mixed state and private company enterprise (1882-1923)

4. Phase IV: Period of Nationalization (1924 onwards)

8. The second and third phases gave rise to a very complicated system with various
permutations and combinations of ownership and management between

government (including district and boards, princely states) and private companies.

There were 10 such systems. In 1902 for example there were 33 separate

administrations including 24 private companies, 4 government agencies, and 5

princely states.

CRITICISM OF THE PROCESS OF RAILWAY DEVELOPMENT IN INDIA

CRITICISM OF THE GUARANTEE SYSTEM

1. The minimum rate of return guaranteed (5%) exceeded the prevailing Libor

(4%) (London Inter-Bank Offered Rate).

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 2. Interest was calculated from the day of the deposit of money rather than

from the day the lines were open.

3. The companies got their 5% regardless of how the money was used,
consequently they seemed to have overspent. The cost of construction of

ones originally estimated at £ 9000/mile (single line) and £ 15,000/mile

(double line) turned out to be £ 13,000/mile (single line) and £ 20,000/mile

(double line). The EIR seemed to have spent about £ 30,000/mile. – Private
profit at public risk.

4. The GOI between 1869 and 1882 borrowed money at 4% from London

money market and constructed lines at a much lower cost. It also adopted

the meter gauge to lower the cost further.

5. The cost of meter gauge line turned out to be £ 6740/mile. Thus proving

that the private companies had spent more on construction than the local

conditions warranted.

6. In short, the criticism by contemporary observers as well as later historians,

that companies because they were guaranteed a set minimum rate of return

on their capital, spent more for construction per track of kilometer is

certainly justified (Hurd). Wasteful construction reduced the rate of return

and unnecessarily increased the subsidy and the drain.

PLACEMENT OF TRACTS

1. Another factor that contributed to the drain of funds was the placement of
tracks.

i. The companies left to themselves, would have placed the tracks on

commercial basis, but placement required government approval.

ii. The government policy on placement of lines was based mainly on

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 1. strategic (military) considerations and

2. sometimes on humanitarian considerations (famine control)

as well.

2. For strategic reasons, the lines built through cities normally avoided the

central business districts and passed through outskirts. This allowed the

lines to be defended from the mobs more easily, but the needs of potential

customers were disregarded.

3. Consequently, the unprofitable lines – those earning less than the

guaranteed 5% and thus requiring subsidy from the government -

accounted for 70% of the total tracks and 43% of the earnings of the

railways in the years 1879 to 1900. Of the earnings of these lines, 81%
accrued to units with a profit of less than 3.5%.

4. In John Hurd’s opinion, there can be no doubt that the subsidy and

consequently the drain would have been reduced had a greater density of

track been placed in regions where profits were likely to be high (regions
with commercial considerations) but the spread of railways would have been

much narrower and large areas of India would have received no railway

service.

i. Most of the Deccan, South and North West was unprofitable and

most of the profitable lines lay in the river basins of north India.

ii. Without subsidies, the spread of railways would have been severely

restricted (though the companies may have tried to be more diligent

in cutting costs and may be much fewer would have required subsidy.

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 5. According to Hurd the subsidy paid by the Indian tax payer to the British

investor due to the guaranteed payment (on uneconomic lines) i.e. the

consequent drain was substantial – about Rs. 568 million - between 1849
and 1900 (the year in which the railway began to earn enough to cover the

guaranteed return on capital) but as a percentage of India’s national income

it was not a very big amount and averaged only 0.2% per annum, not

exceeding more than 0.3% in any of the sample years.

LACK OF SOCIAL BENEFITS RELATIVE TO COST

1. A more serious criticism, according to Hurd, was that the expenditure for
railways did not have the highest social benefit relative to costs.

i. The tax revenue that was spent on railways could have been

alternatively spent other projects which may have yielded higher

social rate of return.

ii. The money might have been spent on public projects such as,

navigation canals, waterways, irrigation and agricultural research

which would have yielded a higher social return.

2. But it seems railways dominated the official thinking of the day. The
government was so sure that railways were a necessity for the effective

political and military control of India and for its economic development that

it did not seriously consider any other alternative investments.

3. Consequently, the railways faced no competition from alternate mean of

transport but for a few exceptions such as boats plying on river Ganga. In
the southern parts of the country the rivers were not navigable for most part

of the year. The roads too were not developed enough either by the

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 government or private effort to afford serious competition to the railways.

Consequently, non-rail competition provided few restraints to the pricing

policies of the railway companies.

4. Government, too, did not fix or regulate the railway rates i.e. it did not have

any direct impact either on freight or passenger rates. Each railway company

thus acted as a profit maximizing entity. However, the government, by

determining the location of railway lines did indirectly influence the prices
that the companies charged.

5. Wide spacing and consequent limited competition led to a situation when

the companies did act as monopolies in setting their prices.

IMPACT OF RAILWAYS ON THE INDIAN ECONOMY

1. The growth of railways in India was quite rapid. Not just in terms of area covered
but also in terms of freight they carried and the passengers they ferried.

SPREAD OF RAILWAYS

Year Track length in Km

1860 1349
1870 7678
1890 25494
1920-21 56980
1946-47 65217

Year No. of Passengers (million)

1871 19
1901 183
1929-30 630

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 1945-46 More than 1000

Year Passenger Km. Pass. Km/Capita

1882 4.6 b 18
1929-30 35.9 b 108
1945-46 66.7 b 164

Year Freight Carried (tonnes)

1871 3.6 m
1901 42.6
1929-30 116
1945-46 143.6

Year Net tonne Km Tonne Km per Head

(freight X distance)
1882 4 billion 15
1946-47 44 billion 118

2. Much of this increase in volume was composed of

a. goods destined for foreign markets or

b. goods being imported into India.

EXPORTS AND IMPORTS

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 1. The railways helped Indian agricultural commodities in particular to become
competitive internationally and made possible an enormous expansion in exports
of goods such as wheat, rice, jute, leather, oilseeds and cotton.

2. Wheat Exports

a. Pre railways – No wheat

b. Post Railways: As much as 13% of the wheat produced in India began to be

exported and even greater percentage of non food crops.

c. By 1886 – 23% of Britain’s imports of wheat were supplied by India.

3. Total Exports and Imports

Year Total Exports (value) Total Imports (value)

1862-1928/29 Increased by 230% Increased by 350%

4. As one can see from the above table, growth in exports was paralleled by increase
in imports. Imports were composed primarily of manufactured items such as cotton
textile, yarn and K goods.

5. By the 1880s the British had become both India’s largest customers and the source
of 75% of her imports.

6. In other words, railways not only reshaped India’s foreign trade but also tied the
Indian economy to the British economy.

7. At the same time railways also reshaped India’s internal trade, both in terms of its
commodity composition and the direction and spread of trade.

8. In the process it also transformed the structure of prices in India. Before the
railways the inter-regional price differences were pronounced and local prices
fluctuated with the changes in local supply conditions especially rainfall. After the
coming of railways regional prices differences narrowed dramatically.

9. Due to the declining cost of transport, not only were the regional markets in India
getting widened, a national market was also emerging.

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COMMERCIALIZATION OF AGRICULTURE:

1. The agricultural sector was deeply affected by the widening of the markets. For the
first time prices in India were susceptible to shifts in the world prices. The Indian
agriculture became linked to world trade cycle.

2. In other words, farmers decisions such as - which crops to plant - were affected by
prices set in international markets. Agriculture moved towards commercialization
and regional specialization occurred. The farmers discovered that they could
produced and sell their surplus outside the region at a relatively stable market
price.

a. Commercialization raised the value of farm output in districts which had

access to railways. This led to an increase in the demand for land, which
stimulated sale of land and brought about higher land prices, rents and
taxes.

b. Who, (i.e. which groups) gained from this export growth depended on the
local conditions.

c. Commercialization and rise in prices brought about an increase in the

income of at least some farmers, and, in places, even the wages of landless
farmers (especially in areas with low population density).

d. Those who experienced an increase in their income often spent it on

consumer goods but also invested in gold and land thus leading to
expansion in acreage in commercialized areas.

e. Consequently rural areas experienced increased imports of gold and

industrial goods.

f. Increase in acreage, it is likely, led to an increase in agricultural employment

in areas that experienced successful commercialization of agriculture;
however, in the absence of sufficient data one cannot be more specific.

IMPACT ON NON-AGRICULTURAL SECTORS

1. The decline in transport costs also had an impact on the non-agricultural sectors.

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 2. In some regions it caused output and employment to expand in certain
occupations and in others to contract.

3. The transport sector itself illustrated this simultaneous expansion and contraction.

4. The railways itself required so many workers that by the late 19 th century, it
constituted the largest single employer within the modern sector

Year Employees
1865 34000
1895 273000
1929 790000
1946/47 1047000
5. At the same time railways was the cause of loss of jobs to many owners and
operators of all alternative means of transport who found themselves unable to
compete.

6. Some carts-men and boatmen, however, reoriented their businesses to align with
the railways instead of competing with them, they began to take goods to the
railways and from the railways. But those involved in long distance trade suffered
loss of employment.

RAILWAYS AND MANUFACTURING SECTOR IN INDIA

1. In the manufacturing Sector the impact of the railways was equally mixed.

2. Before the railways virtually no modern industry existed in India. Railways by

transporting raw materials at lower costs and carrying finished goods to internal
markets. The railways played an important role in the growth of India’s modern
industry.

a. That this growth was extremely limited, however, is evident by the fact
the percentage of the total WF employed in the Industry did not increase
before the 2nd World War.

b. There was nevertheless, a sizeable absolute increase.

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 Workers Employed in Modern Industry

Year No. of Workers

1900 Circa 400,000
1938 Circa 2 million

3. Krishnamurthy (CEHI vol. 2, Chapter: Occupational Structure) was of the opinion

that the overall labour force in industry did not decline during the first half of the
20th century and the even the output of handlooms did not decline (tables
reproduced below are from Krishnamurthy’s article).

1901 1951
Factory Employment 0.6 2.9
Employment in SSI 12.6 11.4
Employment in Manufac. 13.2 14.3

Handloom Output in Undivided India

Years Output
1902-03 to 1912-13 965 m yards
1930-31 to 1937-38 1068 m yards

4. John Hurd, admits that there is some difference of opinion on this count. He states
–

a. Was this increase in modern industry accompanied by a decline in the

labour intensive traditional manufacturing (rural and/or urban), is an issue
far from settled.

i. Some argue that railways caused a decline in handlooms by making

imported and Indian-made factory cloth available at prices lower
than local weavers could charge, and

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 ii. Other maintain that the market position of the handloom cloth was
actually strengthened by the railways due to the new availability of
lower priced factory made yarns and the number of weavers did not
decline.

5. John Hurd is of the opinion that –

It is certainly possible that inputs brought in by railway assisted small-

scale and cottage industries by lowering costs. If this is true, the losses
in employment in traditional industries may have been small and offset
by the gains in modern industries.

6. And thus Hurd seems to have finally arrived at the same conclusion as
Krishnamurthy, i.e. overall, there was no loss in either the output or the
employment in manufacturing in the first half of the 20th century.

7. He further reiterates Krishnamurthy’s conclusion that whatever the absolute gain

or loss in non-agricultural employment, in net terms railways did not alter the
composition of the labour force in the major sectors – i.e. primary, secondary and
tertiary.

8. The absence of a basic structural change in the economy is attributable at least in

part, to the lack of backward linkages that resulted from the way the railways was
built and operated in India.

a. Not only did the financial K used to build railways came from Britain but so
did the management and most of the equipment and skilled labour, rails,
points, fishplates, machinery, locomotive, even sleepers were almost all built
outside India.

b. The initial import of material and manpower was to a large extent dictated
by the lack of heavy industry, and shortage of technical and managerial
skills. in India.

c. But the GOI did little to aid and stimulate the development of heavy industry
or management skills within India.

d. Indeed the GOI urged the companies to ‘buy British’ and only after the
Acworth committee report of 1924 was this policy modified.

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 e. Locomotives are a case in point. Indian railway workshop had proved
capable of manufacturing competitively priced locomotive as early as 1865.
Yet between 1865 and 1941, Indian workshop produced only 700
locomotives, while the British firms exported some 12000 to India.

f. India’s loss from the purchase policy of the railways was not limited to her
lack of progress in developing heavy industry. She also failed to reap the
benefits of spread effects to industry which would have occurred.

g. Instead the spread effect stimulated the British economy.

9. The coal industry was a major exception to this pattern.

a. After railways had depleted the reserves of wood to make charcoal, coal
became the major source of energy used to run the railways.

b. By 1900 railways were using approximately 30% of the coal produced in

India but the fact is that it they did not provide the demand to the coal
industry as they did elsewhere.

c. India had ample reserves but the rates of transporting it by rail was so high
and the sea rates so low that railways in western India often imported British
Coal!

d. Also since labour costs in India were low compared to other countries and
demand did not expand enough to justify bringing in machines to exploit
the economies of scale which in turn would have increased productivity and
consequently lowered the prices.

e. In short, the low prices of labour combined with expensive [domestic]

transport cost prevented the coal industry from developing in India the way
it did in Britain.

f. With limited production of coal, the spread effect of coal industry on other
industries remained limited in India and thus deprived the country to benefit
from cheap energy, which helped many other countries to become
industrial economies.

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 10. The minimal linkages from the railways experienced by the Indian industry was
similarly felt in India’s financial sector and labour markets.

a. John Hurd is of the opinion that since India had low rates of savings and
poorly developed modern capital markets; it is not surprising that the
companies looked towards Britain for capital to build railways.

b. Not everyone agrees with the view that there was a shortage of capital in
India. Among others, Rajat Ray and Prasannan Parthasarathi are of the
opinion that India had ample supply of capital and a sophisticated financial
system.

c. While it may be difficult resolve this question easily, there is no doubt that
railways were almost completely financed by British capital.

d. Approximately 99% of the capital came from Britain and merely 1% from
India. Hence just as in the case of industry, Indian railways assisted the
evolution of the British capital markets, while having no effect on those in
India.

e. Similarly for labour, in India, Railways did not become the training ground
for skilled personnel, as it did in Europe and North America.

i. Some Indians learned the skills and acquired experience.

ii. By 1938 the railway workshops where rolling stock was repaired and
some was built employed 1,10,000 people, mostly Indians. Indians
also came to be hired as lower-level personnel in such jobs as engine
drivers and guards.

iii. Posts in Management and technical personnel, however, continued

to be held by the Britons, until well after the 1 st WW, a reflection of
racial discrimination rather than labour market necessities.

IMPACT OF STRUCTURE OF RATES ON TRADE (INTERNAL AND EXTERNAL)

1. We have already, to some extent, discussed the issue of placement of tracks, how
it affected the profitability of the companies because the GOI forced them to place
railway tracks not on the basis of commercial logic but strategic logic.

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 Consequently 70% of the tracts could not make even 5% profit and were entitled
to a subsidy by the government. We now consider the issue of freight charges.

2. In countries other than India, the structure of (freight) rates were determined by a
number of factors:

a. the price and availability of alternatives

b. direct regulation of rates by government

c. the degree of competition within the industry itself

3. In India, in contrast to the US and Europe, alternative methods of transport could

rarely compete either in rates or in services with the railways.

a. Non-rail competition therefore provided a few restraints to the pricing policies of the
railway companies.

b. Nor was the government a limiting factor, for it did not fix or regulate railway rates. The
government exercised virtually no direct regulation over the companies.

c. Whatever the type of ownership, whatever the kind of guarantee, each railway company
operated as a profit maximizing entity, independent in its setting of rates, fares and service
policies.

d. Indirectly however, the government, by determining the location of lines, did influence
rates. Wide spacing and limited completion that resulted led to the creation of markets in
which companies could and often did act as monopolies in setting their prices.

e. From the beginning of the railways in India, certain firms dominated the
sales.

i. The monopoly by the EIR of much of the area between Punjab and
Calcutta, a region rich in agricultural and mineral resources,
permitted it to earn 34% of all earnings in 1887 even though it owned
only 16% of the total length of track.

ii. By 1897, competition resulting from the construction of the track by

other systems reduced the total length of track owned by EIR to 9%
but it still garnered 23% of the earning.

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 iii. EIR along with GIPR was already responsible for 56% of gross
earnings of the railways. By 1938-39, the share of these two had fallen
to 32% but 68% of total rail business was still held by only 5
companies.

f. Furthermore, since each company operated in its own zone or region, it did
not fear competition from other companies in the country.

i. Even when territories overlapped and two lines came into relative
proximity, the paucity of roads allowed customers few options.

ii. Consequently, the demand for services of individual companies was

less elastic than it would have been had there been more
competition, and led to higher rates than would have been charged
had firms faced more competition.

g. Comparatively, Indians paid more to ship goods by rail than did customers
in those countries which competed directly with India in international trade.

i. For example, the cost per tonne to transport grain for export was, in
absolute terms 40% to 60% lower in the US than in India at the then
prevailing exchange rates.

ii. The high rates charged naturally deterred the growth of agricultural
exports as well as the volume of internal shipments.

4. While the Indian railways did possess significant monopoly power, the power was
not absolute, nor was it static.

a. In the initial phase of railway service from 1853 until approximately 1880,
when the great trunk lines were being constructed inland from ports, no
firm could bid for any portion of another firms customers and therefore high
freight rates prevailed.

b. However, when the 2nd phase began about 1880, some competition was
introduced in North India. With the expansion of network, the firms’
networks began to meet their rivals’ at the extremities of their own, and for
the first time their interests collided.

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c. Competition between the northern lines, serving the ports, caused the all
India average freight price to decline steadily. Between 1881 and 1916-17,
the absolute rates were reduced 50%. Real rates (in constant rupees) went
down even further 84% between 1881 and 1919-20.

i. It meant that in 1882 to ship an adult’s average annual consumption

of 204 kg of grain, 1500 km from the surplus regions of Punjab to
Bombay city cost approximately 30% of National PCY. By 1919-20 the
cost had decreased to a mere 4%.

ii. As the rates declined shippers responded and ton kilometres per
running track kilometre rose from 229,000 in 1882 to 578,000.

d. In the 3rd phase of railway operation beginning c.1916, serious rivalry

between the companies came to an end.

e. In phase 2 when the rates had began to decline, the government fearing
that lowering rates would reduce profits and necessitate increased
payments under the guarantee acted to prevent the rates from falling too
much. Besides setting minimum rates, it permitted and encouraged mergers
between companies, establishment of branch lines and agreements
between them and thereby limited competition.

i. Consequently, the companies established their spheres of influence

that had weakened during the second phase and their shares of the
market began to stabilize.

ii. Branch lines by their nature were monopolies hence the demand on
them was less elastic.

iii. Actual rates now rose between 1916-17 and 1922-23 by 51%. In
monetary terms and 221% in real terms between 1919-20 and 1933-
34. They then remained constant till the 2nd WW.

iv. The cost of sending 204 kg of grain over 1500 km that had fallen to
4% of national PCY rose to 11.5% by 1933-34.

v. Transporters responded to the change in rates and the rapid increase

that had occurred until 1918-19 ceased.

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5. High rates was not the only aspect of the structure of rates, the companies also
practiced price discrimination by charging some customers more than others in
order to maximize profits.

a. Rates for long-haul freight were set considerably lower than those for short
haul freight.

i. Partly because more competition existed over longer distances and

ii. Partly because long was haul was less costly to handle.

b. Block rates were also instituted. These rates gave concessions to shippers
who stayed with the same company for the long haul, on the other hand
those who changed the line were charged a premium, this helped
companies maintain their monopoly.

6. In addition, companies charged lower rates to and from the ports than for
comparable inland distances. According to Hurd there were several reasons for
this.

a. In general shipments to and fro from ports tended to be large and thus less
costly to handle than inland shipments.

b. And whether the shipment was intended for exports or for the port itself, it
was often a single operation (similarly for imports), whereas deliveries
between inland points often necessitated unloading of goods at several
locations which increased handling costs.

c. Since the shipments to the ports generally accounted for the largest
demand, companies were anxious to find customers for the back haul to the
interior.

d. As on some routes (such as Bombay-Calcutta – or one could ship from Delhi

to Calcutta and thereon by ship to Bombay) coastal shipping provided an
alternative, it induced the companies to offer cheaper rates.

7. All types of discriminatory rates mentioned above (long haul, short haul, block etc.),
provided the businesses in the interior with incentives to ship long distance on

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single trunk lines. Fall in international sea-freight rates and massive increase in
demand for Indian goods from abroad also favoured this trend.

Percentage of Exports that were sent from the Provinces to the Ports
(Typical Year 1905-06)
Province Percentage
Sind 75
Punjab 61
C. P. 76
Bombay 75
U.P. 51
Madras 78
Assam 58
Bengal 87

a. The Structure of rates attracted industry as well as trade to the ports.

b. To those industries for whom transport cost was a significant part of the
costs these savings are particularly appealing. Because of the concession to
and from the ports location in the ports reduced the costs of transport both
for raw material and finished products.

c. As commercial activities and industries expanded port cities too expanded

exponentially. Karachi, for example, quadrupled between 1872 and 1931, a
period in which India’s population only grew 32%.

d. But at the same time, railways also caused the decline of some cities, as it
caused them to lose their economic function.

i. A city such as Mirzapur, a key terminus on the Ganga, for the inland
cotton trade carried by pack bullock had been very prosperous in the
cotton boom of 1860s.

ii. As cotton increasingly got transported by railways, Mirzapur declined

and its population had dropped by 50% between 1881 and 1911.

e. As a result of similar changes in other parts of the country as well there was
little change in the proportion of Indian population living in urban areas.
There was, however, a shift from the declining urban areas to the ports and
the junctions and collection points of agricultural produce.

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8. Railway rates created incentives not only for the geographical reorganization of
India’s economic activities but also the types of production in which it could
specialize. That industry was put at a comparative disadvantage was soon
recognized.

a. The Indian industrialists and nationalist complained bitterly about the

impact of the structure of freight rates on the infant industries, particularly
those not located at the ports.

b. They cited for example the fact that the charges for shipping imported
matches from Bombay to Delhi were the same as those for shipping
matches made in Ahmadabad to Delhi even though Ahmadabad was 483
km closer.

c. In other words, the block rates did indeed impede the establishment of
industries that would have served internal markets.

d. It must be emphasized that it was not only the structure of rates but also
their high level that hindered the development of the Indian industry.

i. High transport charges increased costs and made competition with

foreign industry more difficult.

ii. This was especially true for those industries for whom freight cost
formed a significant proportion of costs. Any industry using coal as a
major source of energy found itself immediately handicapped.

iii. In short, relatively high level of transport costs was a major factor in
the slow growth of industry in India.

9. Agriculture on the other hand was relatively favoured by railway rates over
Industry.

a. In contrast to modern industry, which had to bring in energy and raw

material from outside, agriculture’s inputs were produced locally.

b. Nor was the scale a factor. In the absence of protective tariffs, many
industries failed to achieve economies of scale, i. e. a size large enough to
compete with foreign producers who had an advantage of low costs of local

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 transport and low sea freight rates to India, in case of agriculture this
problem did not exist.

c. The relative abundance of good land and cheap labour kept the production
costs low, and the relative inexpensive sea freight allowed agriculture to
compete in overseas market as long as railway rates to ports remained
advantageous.

d. Looking at the composition of freight revenue for a typical year 1901

i. 60% of freight revenue was derived from the agriculture produce

ii. Coal, salt and imported piece-goods, twist and yarn, accounted for
another 20%

iii. Clearly, Indian manufacturing formed a very small proportion of the

freight revenue and shipments

e. However, despite the favoured position in which railways put agriculture, it

did not prove to be a growth sector. Nor did agriculture stimulate significant
growth in other sectors of the economy.

f. Yet it is an open question whether agricultures failure to establish itself as a

leading sector was due to

1. the structure of agriculture itself or

2. whether the period of low railways freight rates was too short
to enable agriculture to establish itself as the leading sector.

g. Agriculture did have a linkage with other sectors of the economy.

i. It purchased consumer goods and supplied raw materials to the

industry.

ii. It supplied food to urban centres

iii. It earned a considerable amount of foreign exchange

iv. Yet, agriculture did not have a large enough demand for inputs from
other sectors.

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 v. Capital equipment such as ploughs and hoes continued to be
produced locally, and agricultural production remained labour
intensive.

vi. Most of the processing machines were imported.

vii. Hence it could be argued that insufficient linkages was at the root of
agriculture’s failure to encourage the industry that could service it.

h. Could it be also argued that inflexibility in the agricultural institutions was

responsible for agriculture’s failure to expand?

i. In other words, the limited agricultural expansion that happened,

happened because of expansion in acreage, the expansion in
productivity would have required institutional change, and these
were not forthcoming.

ii. Hurd asserts that for political reasons, the government refused to
tamper with existing rural institutions, there were few land reforms
and under the circumstances the possibility of agricultural
transformation was limited.

10. However, while limited linkages to other sectors and its institutional framework
may have been responsible for the lack of significant agricultural growth, railway
rates may have also played their part.

a. The general decline in transport costs brought about by the railways had
initiated regional specialization, but through most of the 19th century the
railway rates were still too high to allow specialization to become
widespread.

b. We already know that while port freights were somewhat cheaper, they
tended to be too high for inter-regional shipments. This may help explain
the reluctance to specialize.

c. When railway rates dropped, farmers were quick to react. Between 1903 and
1919-20, when the rates fell steeply, shipments for exports and inter-
regional trade increased as did the move towards specialization.

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 d. Between 1902 and 1912, the ton km shipped per track km rose 67% and
between 1912 and 1918-19 another 28%.

e. In other words, the institutional and other constraints could have been
overcome to some extent had the freight charges been relatively lower.

CONCLUSION

1. In the limited economic development that India experienced before Independence,

railways unquestionably played a major role.

2. Without them, freight shipments would have been much more expensive and fewer
goods would have been transported to internal and overseas market.

3. Railways led to

a. increased agricultural output,

b. the growth of modern industry and mining,

c. New jobs – although many jobs were lost –

d. The redistribution of the urban population

e. Higher income for some segments of the population.

4. Yet in the long run, these changes did not alter the basic structure of the economy.

5. Not until Independence, the railways development became a conscious and

pursued policy, did the railways begin to realize their potential for assisting in the
transformation of the Indian economy.

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