The making of a corporate leviathan

The broad outline of the story will be familiar to most Indian readers. The last great Mughal emperor, Aurangzeb—a capable general and dogmatic ruler—died on 20 February 1707. His death created a power vacuum in the subcontinent. A number of local rulers started asserting their autonomy by delaying or refusing outright to pay imperial taxes. A series of rapacious adventurers raided the capital, Delhi, to plunder its fabled riches, depleting the imperial treasury.

Tragically, even as the Mughal emperor steadily lost his military prowess and fiscal resources, his value as a nominal figurehead kept increasing. As the conferrer of izzat and iqbal (honour and legitimacy)—hard to define yet twin essential attributes of Indian statecraft—his edicts were coveted by a number of shrewd and ambitious politicians, from Mahadji Scindia to Robert Clive. The upshot was that during the next few decades, a number of contenders jostled for the Mughal legacy while remaining nominally subservient to the emperor.

In this age of treacherous and shifting alliances, the East India Company (EIC) consolidated its power through a combination of fortuitous coincidences and hard-won conquests. The Anarchy, by the celebrated historian William Dalrymple, is essentially a story of this power grab. Khair-ud-Din, a contemporary chronicler, describes those turbulent times in the following words: “Disorder and corruption no longer sought to hide themselves and the once peaceful realm of India has become the abode of anarchy."

The Anarchy would be far less interesting, at least to an economist, if it were merely a chronicle of the ways the EIC vanquished its rivals and became a political hegemon. Rather, it is a story of the EIC becoming a corporate leviathan. As Dalrymple notes: “The Company’s conquest of India remains the supreme act of corporate violence in world history."

The idea of a joint stock company—an artificial entity with perpetual corporate existence—was culturally alien during the Mughal period. For example, Mir Jafar, the short-lived Bengal nawab, imagined the EIC to be an individual and expressed an “earnest desire" to meet him in person.

It is certainly true that the EIC was a pioneer in many scandals that would be instantly recognizable to students of corporate governance. In what must count as among the oldest examples of insider trading, when Clive landed in India and got to know the outcome of the Buxar war—which would later confer on the EIC the tax collection rights in three rich states of Bihar, Bengal and Orissa—the first thing he did was to instruct his agent in London to pledge all his property and buy as many shares of the EIC as possible. A key managerial personnel trading on insider information today would face criminal charges and probably end up in jail.

Another striking detail pointed out by Dalrymple is the association of the EIC with Indian finance. A family of Oswal Jains, who were conferred the hereditary title of Jagat Seths due to their extensive banking network, was among the earliest financiers of the EIC’s military ventures.

Was it the support of domestic finance that actually made the EIC a winner, or were domestic bankers merely betting on the horse most likely to win the race? Like most social science issues, the causality is fiendishly difficult to establish. Much more research may be needed to answer this vexed question.

One of the most interesting parts of the book—and central to its narrative—is the impeachment of the first governor of the presidency of Fort William, Warren Hastings, for corruption and misdemeanour. Dalrymple treats it symbolically as a trial of the EIC itself, not merely the trial of an erring official. “It was the nearest thing the British ever got to putting the Company’s Indian empire on trial," he writes.

Edmund Burke, the rising Whig politician and an orator par excellence, opened the charge against Hastings and argued for four days in favour of his impeachment. His eloquence was astounding. Hastings, Burke said, was guilty of practising a “geographical morality...as if when you have crossed the equatorial, all virtue dies".

Burke’s invocation of universal “natural rights" will have strong resonance today. The only problem was that the impeachment was botched and vitiated. The charge sheet was drawn by Philip Francis, who had a personal axe to grind. Rather than specific allegations, the impeachment was based on sweeping charges and the arguments were dominated by political rhetoric. The proceedings were also marred by factual inaccuracies. Rather than appealing to reason and evidence, the prosecution appealed to the ignorance of the House on issues related to India.

Eventually, the trial ended up indicting the wrong person. While Hastings was no saint, he was certainly not “a doctor (and) a professor upon the subject of crime", as Burke made him out to be. Dalrymple notes: “He (Hastings) unified currency systems, ordered the codification of Hindu laws and digests of Muslim law books, reformed the tax and custom system, fixed land revenue and stopped the worst oppression being carried out on behalf of private traders by the local agents." He was instrumental in the formation of the Asiatic Society and wrote the introduction to the first English translation of the Bhagavad Gita.

A different conclusion on the Hastings impeachment saga is possible to imagine. In the absence of rigorous legal scrutiny, however, pious invocations of universal principles could be hijacked by personal agendas. Yet, more than the Hastings impeachment, the choice of his successor turned out to be the most consequential decision the British parliament ever made. Let me explain.

Economists such as Daron Acemoğlu have established a strong link between colonial rule and present levels of development. They point out that colonial institutional arrangements were contingent on whether the colonists wanted to settle in a country permanently or not. If they decided to settle permanently, their institutional arrangement would impose strong checks and balances on the government of the day.

In contrast, in countries where they decided not to settle, the institutions were designed to be extractive and the power of the government was absolute. Since postcolonial successors too had strong incentives to perpetuate these arrangements, such institutions ended up having an enormous influence on current levels of development.

It is interesting to note that Hastings’ successor, Lord Cornwallis, was responsible for the far-reaching decision on the settlement of Europeans in India. Following his American experience of losing the country to settlers, he was determined not to let a permanent colony of Britishers emerge in India. He put his policy into effect by imposing a number of restrictions on the Anglo-Indian community.

Curiously, he was also responsible for enacting the land tenancy laws in the EIC’s dominion. His permanent settlement system essentially auctioned off parcels of landholdings. It was exactly the kind of extractive law which, according to Acemoglu et al, would have been enacted in a country Europeans decided not to settle in.

Eric Hobsbawm, arguably one of the greatest historians, taught us that the only result of a horse race historians can tell us about with absolute confidence is one that has already been run. Still, when we let history speak on its own terms, the complexities, nuances, insights and even ironies of the past start illuminating the present.

Avinash M. Tripathi is an associate research fellow (economics) at Takshashila Institution, Bengaluru.