150 years of BSE: When the nation witnessed a rally before independence

The concluding part of the Booms and Busts series looks at the share market rally ahead of Independence, and its eventual decline

The period leading up to Independence had been good for the stock market. 

Shares began to gain momentum after the central Budget of February 1946. There were hopes of availability of cheaper capital, higher dividend, and an accumulation of surplus investible funds. The economic adviser’s general index, a proxy for the stock market used by the Reserve Bank of India (RBI) at the time, gained 12 per cent between June and August. Some profit-booking followed. 

“…profit-taking … was later followed by a violent break in September, following the outbreak of communal disturbances in several parts of the country, the Economic Adviser’s index receding to 282 during this month,” according to the RBI’s 1946-47 Annual Report. The communal riots of the time had economic consequences. 

For example, the textile industry in Amritsar faced damaged machinery and labour shortages due to the dislocation caused by partition. 

General strikes, labour unrest, and fears of government action on profiteering added to the decline. The fears were not unfounded. Liaquat Ali Khan presented the interim Budget on February 28, 1947. He introduced a special tax on profits over a threshold and a capital gains tax, and proposed an increased corporation tax. Indirect tax proposals included doubling export duty on tea. 

“Honourable Members must be well aware of the extent to which large capital gains have been made in recent years and are still being made owing to prevailing conditions. These profits are, as the law stands, outside the scope of the Income-tax Act. I feel very strongly that this lacuna in our legislation should be filled,” he said while presenting the Budget. 

“There is stronger justification for taxing these profits than there is for taxing ordinary income since they represent what is 

properly described as unearned increment,” he added, a sentiment which would find echoes in future Budgets. 

 

The proposals faced opposition from industrialists, the stock market tanked, and the exchanges were shut in Bombay (Mumbai), Calcutta (Kolkata), and Madras (Chennai). Indian and British businesses pushed back. The Congress attempted to dissociate itself from the proposals. The Congress and the Muslim League had negotiated the finance portfolio for 

Khan when the League joined the interim government. 

Among the few defenders of the Budget was the man who was shunted to the industries and supplies portfolio from finance after the League joined the interim government. John Matthai, who again became finance minister after Independence and was considered close to Jawaharlal Nehru, pointed out the burden of direct taxes on industry and trade was lower in the latest Budget than in the previous one.  

Khan’s taxes were ultimately negotiated to lower levels, and the threshold for capital gains tax was tripled, diluting much of the measures’ effects. 

“The Bombay Stock Exchange re-opened today after sixteen days and trading was allowed with certain restrictions,” noted  the March 18, 1947, edition of The Bombay Chronicle. 

The broad direction of the market remained downward during the year amid partition, riots, and uncertainties over government policy. Earnings were also likely affected by a rise in commodity prices and higher labour costs. The economic adviser’s general index was at 215.2 in May 1947. 

The downtrend is said to have continued till July 1949. 

Some have argued that the Budget was a factor in fence-sitters finally opting for partition, if only to avoid issues in working with the Muslim League. The Congress Working Committee passed the resolution for partition on March 8, less than a fortnight after the Budget. 

Khan went on to become the first Prime Minister of Pakistan. He was assassinated in 1951. 

Key sources

  *  Raghabendra Chattopadhyay (1988): Liaquat Ali Khan’s Budget of 1947-48: The Tryst with Destiny

  *  RBI Annual Reports

  *  The Bombay Chronicle

  *  Sharif Al Mujahid (2005): “Liaquat: an assessment”, Dawn

  *  P J Thomas (1948): Report On The Regulation Of The Stock Market In India  

  *  Ian Talbot (2007): A Tale of Two Cities: The Aftermath of Partition for Lahore and  Amritsar 1947-1957