The invitation from Prime Minister Jawaharlal Nehru to John Matthai on September 20, 1948, to become the finance minister was not the first time that the accomplished economist was being asked to take charge of the government’s finances. In 1946, when Nehru had to suggest a few names to be part of the interim government in the run-up to India becoming an independent country, the name of John Matthai had figured among the 14 ministers that were to take oath to take charge of the ministries. Viceroy Wavell, Nehru, and Jinnah . . . all were in favour of Matthai becoming the finance minister in the interim government.
However, that stint lasted only about a month. Matthai was sworn in as the finance member (ministers were designated as “members” in the interim government) on September 9, 1946. But within a month the Muslim League decided to join the interim government, and its representative, Liaquat Ali Khan, became the finance member. However, even during that short stint, Matthai had left his mark as an administrator by quickly abolishing the controversial salt duty, which had become a bone of contention during British rule. After Liaquat Ali Khan took charge of the finance portfolio, Matthai was asked to look after the industries and supplies portfolio in the interim government from October 26, 1946 to August 14, 1947. In the first government formed by Nehru after Independence, Matthai became a Cabinet minister for railways and transport.
In the process, Matthai had lost the opportunity of producing the Budget for the interim government in March 1947. That was presented by Liaquat Ali Khan. It was the same Budget that had mooted the idea of setting up an Income Tax Investigation Commission to probe cases of tax evasion by companies. Matthai played a role in this, even though he was not the finance member. Viceroy Wavell had mandated that the Budget proposals would be vetted by a committee consisting of himself, Liaquat Ali Khan, Nehru and Matthai. But that did not prevent an outcry against the Budget proposals, particularly from Congress members, led, among others, by Vallabhbhai Patel. Congress members alleged that the proposal was primarily aimed at Hindu business leaders. And their target of attack was John Matthai, because he was among those who had approved the proposal when it came up for review by the committee headed by Wavell.
For leaders like Matthai, opportunities knock at their door not just once but several times. That is exactly what happened in September 1948 after Chetty quit suddenly after the controversy over the manner in which some names to be probed by the Income Tax Investigation Commission had been withdrawn by the finance ministry. The irony for Patel was that the man whose appointment as finance minister was opposed by him just about 14 months ago was back in the reckoning. As far as Nehru was concerned, he was getting the man he had originally wanted as his finance minister.
Born on January 10, 1886, John Matthai hailed from a well-to-do and widely respected Syrian Christian family based in Travancore. A brilliant student, he graduated from Madras Christian College and also completed his law degree from Madras Law College before he went to Oxford for higher education. He completed his doctoral research at the London School of Economics, specialising in the cooperative movement and village government in British India. But before he went to Oxford for higher studies, he had practised as a lawyer in India for about four years. On his return to India, he joined the Madras government in 1918 to serve in its cooperative department as an officer on special duty for about two years. Subsequently, he took to teaching, and taught economics at Presidency College. He remained in government service till 1940 in different capacities, such as member and chairman of the Tariff Board, and later as the director-general of Commercial Intelligence and Statistics.
In 1940, he also worked for the private sector as a director with the Tata group and had been in charge of Tata Chemicals for about two years. Matthai was one of the authors of the famous Bombay Plan that had laid out the investment programme and policy priorities that India must adopt after Independence. The two-part document – “A Brief Memorandum Outlining a Plan of Economic Development for India” – was brought out in 1944–45 and was produced by Matthai and seven other leading industrialists and bankers of the day. They were JRD Tata, Ghanshyam Das Birla, Ardeshir Dalal, Lala Shri Ram, Kasturbhai Lalbhai, Ardeshir Darabshaw Shroff, and Purshottamdas Thakurdas. When the British government offered Matthai a place in the executive council as a finance member of the interim government, it was appointing not just a well-regarded economist, teacher and administrator, but also a man with a clear vision for India’s economic development.
The economy Matthai inherited when he took charge of the finance ministry in September 1948, was not in good shape. The adverse effects of the Second World War and Partition were still troubling the economy. Inflation was on the rise and India had to rely on higher food imports, which created stress for the country’s foreign exchange reserves or its sterling balances. Owing to the failure of crops in India because of poor rains, food imports had risen – from about 2 million tonnes, at Rs 110 crore, in 1947–48 to 2.8 million tonnes in 1948–49, at Rs 130 crore.
Floods in Bihar and the United Provinces (erstwhile Uttar Pradesh), cyclone damages in Bombay and outbreak of famine in parts of Gujarat, Saurashtra, Rajasthan, and Kutch were threatening to push up the demand for food imports to almost 4 million tonnes in 1949–50. The state of the capital market also worried the new finance minister. The investment market in the country remained stagnant, with little money flowing into either government loans or industrial projects. This was a consequence of the mood of uncertainty that prevailed in the economy, which in turn adversely affected industrial development and its prospects.
What caused more concern to Matthai as he took charge of the government’s finances was the rapidly declining sterling balances held by the Reserve Bank of India. They had risen to a peak level of Rs 1,733 crore at the end of March 1946, only to fall to Rs 1,612 crore by the end of March 1947, and further to Rs 1,545 crore by the end of March 1948. The reduction was largely a result of an increase in imports of food and other goods. But the pace of the reduction had slowed in 1947–48 because of restrictions on imports.
In July 1948, India entered into an agreement with the United Kingdom whereby an estimated 80 million pound sterling was credited to India, which it could use to finance imports till June 1951. Consequently, Matthai could relax some of the import controls. Similarly, a currency agreement between India and Pakistan in July 1948 facilitated settlement of bilateral trade payments beyond a certain limit in pound sterling. These were developments that made Matthai’s task as finance minister a little less onerous.
By October 1948, Matthai had introduced anti-inflationary measures which had a positive impact on the price situation. In a bid to prevent further creation of purchasing power in the hands of consumers, the newly appointed finance minister imposed higher import duties on articles of luxury, such as liquor, tobacco, motor cars, silk, and art silk fabrics. In addition, an excise duty on superfine cloth was levied. The government assumed additional powers to make provisional assessment of income tax on the basis of returns submitted by assesses. Matthai also revived a scheme for interest-bearing deposits for income tax – a system that had been introduced in 1943. Refund of deposits of excess profits tax was postponed for a further period of three years, except for a few approved purposes. A temporary limit was imposed on the amount that could be distributed as dividend by public companies. All these measures were taken to clamp down on prices. Indeed, inflation came under control in the first few months of these measures. However, by the time Matthai was ready to present the Budget on February 28, 1949, inflation had begun to inch up once again.
While controlling inflation was a priority for Matthai, revival of the industrial investment climate in the country was no less a concern for him. The finance minister believed that as important as controlling inflation was the need to augment domestic supplies of goods, for which boosting production in the economy was necessary. Thus, there was a reduction in import duties on machinery and a few industrial raw materials. And import duty on cotton yarn was abolished. New industrial undertakings commencing production in the next three years were exempted from income tax for five years up to a limit of 6 per cent per annum on their capital, and depreciation allowance rules were liberalised. Expenditure schemes meant for the provinces and states were expedited so that they could help meet the demand for goods within the country.
Excerpted with permission from India’s Finance Ministers: From Independence to Emergency (1947–1977), AK Bhattacharya, Penguin.