Company Raj to Debt Raj—II Diwani & anatomy of fiscal sovereignty

Plassey changed who could manipulate power in Bengal. Buxar changed who could finance it. The Battle of Buxar in October 1764 is less celebrated than Plassey but more important for understanding how the East India Company (EIC) became a territorial power. Company forces defeated the combined armies of Mir Qasim, Shuja-ud-Daula of Awadh and Mughal emperor Shah Alam II. Military victory was followed by an institutional settlement whose significance far exceeded the battlefield.

On August 12, 1765, Shah Alam II granted the Company the Diwani of Bengal, Bihar and Orissa. The EIC thereby obtained the right to collect revenue in some of the richest territories of the Mughal world. The arrangement required payments to the emperor and the nawab, but the fiscal surplus accrued to the Company. 

Historic account of the Diwani records the structure of this settlement. This was the moment at which the political economy of empire changed. Trade had already generated wealth. Plassey had generated influence. The Diwani supplied a territorial revenue base.  Thus trade became territory and commerce revenue. A corporation converted into a fiscal authority. 

The British Library’s Clive papers tell this story in the dry language of accounts. They include an “Account of treasure exported from Bengal since the grant of the diwani, 1765–1768” and records of the “Territorial Acquisitions and Revenues obtained in India by the East India Company since 1756”. The archival catalogue is revealing precisely because it strips away later imperial romance. The transformation appears as revenue, remittance and appropriation.

Philip J. Stern’s The Company-State helps explain why the EIC should not be imagined as a harmless merchant suddenly converted into a government after Plassey. The Company had long exercised jurisdiction, diplomacy, military force and forms of corporate sovereignty. What Bengal supplied was something decisive: a fiscal base large enough to make those capacities durable. Oxford Academic describes Stern’s reconstruction of the Company as a political body as well as a commercial one.

Before the Diwani, Company expansion depended heavily upon bullion imports, trade profits, credit and political privilege. After it, Indian revenues could increasingly finance Company administration, Company purchases and Company armies. Revenue collected in Bengal could be used to purchase Indian goods for export instead of relying to the same extent on bullion remitted from Britain. Fiscal control therefore altered the Company’s commercial model as well as its political power.

This is where the idea of “drain” begins to acquire an institutional form, even though the later nationalist theory associated with Dadabhai Naoroji belonged to a different century. 

The essential mechanism was already visible: resources raised within India could be appropriated, remitted or converted into export purchases under an authority increasingly insulated from those who produced the revenue. The political question was no longer merely who traded in Bengal, but who could command Bengal’s surplus.

The conquered economy increasingly financed the machinery of its own conquest. That mechanism is more revealing than any claim that one civilisation defeated another. The Company did not conquer from outside a sealed Indian economy. It entered existing networks of finance, recruited Indian soldiers, bargained with Indian elites and eventually redirected Indian revenues.

The transition was not instantaneous. Between 1765 and 1772, Bengal operated under what became known as the dual system. The Company controlled revenue while much of the visible machinery of administration remained associated with the nawab and Indian officials. A brief  history of the East India Company notes that the Company enjoyed Bengal’s revenues while initially assuming limited responsibility for civil administration.

This separation of financial power from public responsibility deserves particular attention. Shah Alam remained emperor. A nawab remained in Bengal. Existing institutions survived. Ceremonial sovereignty persisted. Its material foundations had begun to move elsewhere.

The arrangement also exposed a recurring pathology of externally anchored rule: authority over resources can expand faster than responsibility for social outcomes. The Company’s early priority was revenue and commercial advantage, not the construction of an accountable public order. 

Later parliamentary intervention in Britain would partly arise from the disorder, corruption and financial instability generated by this hybrid company-state. Corporate sovereignty did not eliminate dependence on the metropolitan state; it produced a new entanglement between private accumulation and public power.

Who commanded the revenue? Who could borrow against it? Who financed the army? Who appropriated the surplus? These questions disclose sovereignty more accurately than titles, flags or court ritual. The East India Company matters for Pakistan today for precisely this reason. 

The East Indian Company was a chartered, profit-seeking corporation that possessed armies, acquired territory and exercised coercive jurisdiction. 

The IMF is a multilateral financial institution created by sovereign states; Pakistan is itself a member. Historical comparison becomes serious only when equivalence is rejected and mechanisms are examined.

The International Monetary Fund (IMF) is not another per se EIC.  The deeper problem is that Pakistan repeatedly creates conditions in which others acquire leverage over choices that should have remained its own. In that limited but consequential sense, recurrent dependence risks turning the IMF into a neo-East India Company in Pakistan’s political economy—not by conquering territory, but by acquiring influence over the fiscal choices of a formally sovereign state.

EIC rule demonstrates that sovereignty can be weakened before its formal symbols disappear. External power becomes durable when domestic structures make dependence profitable, convenient or unavoidable for influential local actors. 

Credit can precede coercion. Fiscal authority can matter more than ceremonial sovereignty. Local elites may facilitate external influence because cooperation serves immediate interests even when long-term autonomy is reduced.

Pakistan speaks frequently of sovereignty, civilisational confidence and national destiny. Such language has its place. It becomes an evasion when it substitutes for the material foundations of independence. 

A state secures sovereignty not by celebrating an inherited civilisation but by retaining the capacity to tax fairly, allocate resources rationally, build productive capacity, regulate economic power and determine long-term priorities without recurrent emergency dependence. The history of the East India Company leaves a question more disturbing than how a handful of foreigners once conquered the Subcontinent: how did a society possessing immense wealth, sophisticated financial networks and established political institutions reach a point where a private corporation could turn its own revenues into the means of ruling it?

The contemporary question follows naturally. How did a formally sovereign Pakistan reach a condition in which recurring external financing increasingly defines the boundaries within which taxation, energy pricing, public expenditure, privatisation and other economic choices are negotiated?

The distance between Diwani and conditionality is immense. The first belonged to colonial conquest; the second operates within an international system of formally sovereign states. But one analytical question survives across the centuries: who ultimately controls the fiscal choices of the state?

That question will take the series from Company Raj to debt dependence. Part III will examine Pakistan’s recurring relationship with the IMF, the domestic political economy that repeatedly produces external dependence, and the difference between formal sovereignty and what may be called fiscal sovereignty capture.

References

1. Philip J. Stern, The Company-State: Corporate Sovereignty and the Early Modern Foundations of the British Empire in India, Oxford University Press, 2011. 
2. British Library, Clive Collection, including accounts of treasure exported after the Diwani and territorial revenues obtained by the East India Company. 
3. Banglapedia, “Diwani”, on the 1765 revenue settlement and the Company’s acquisition of revenue authority in Bengal, Bihar and Orissa. 
4. Banglapedia, “East India Company”, Plassey, Diwani and the dual system from 1765 to 1772. 
5. Spencer A. Leonard, “‘A Theatre of Disputes’: The East India Company Election of 1764 as the Founding of British India”, The Journal of Imperial and Commonwealth History 42(4), 2014. 
6. William Dalrymple, The Anarchy: The Relentless Rise of the East India Company, Bloomsbury, 2019. 

[To be continued]

________________________________________________________________

Dr. Ikramul Haq, Advocate Supreme Court, writer, literary critic, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.