Halliday was compelled by ill-health to take long leave home. He was on sixteen occasions examined by the Parliamentary committees on the renewal of the East India Company's charter, granted in 1853.
Returning to India, he took his seat on the governor-general's council on 5 Oct. 1853, on the nomination of the court of directors, Bengal, hitherto directly administered by the governor-general, was constituted on 1 May 1854 a lieutenant-governorship, and Dalhousie appointed Halliday as 'the fittest man in the service ... to hold this great and important office' of ruler of a territory comprising 253,000 square miles, with a population inadequately estimated at forty millions. Sir John Kaye credited him with natural ability, administrative sagacity, and a sufficiency in council which had won him general confidence (Hist. of Sepoy War, 9th edit. p. 58). Halliday sought with vigour to reform the administration of Bengal, the most backward of the great provinces of India (Sir John Strachey's India, chap. xxii.). In a valuable minute (30 April 1856) he submitted a scheme for the complete reorganisation of the police, and carried much of it into effect. Road communications were improved and extended, and Halliday supervised the up-country administration by prolonged and difficult tours in all directions. On several matters he came into conflict with members of the government of India, and in a private letter (6 Jan. 1856) Dalhousie was constrained to confess that 'he has so managed that I beheve he has not in Bengal a single influential friend but myself' (Dalhousie's Private Letters, 1901). In hearty sympathy with the policy of educational advance laid down in the despatch of Sir Charles Wood, first Viscount Halifax [q. v.], Halliday appointed a director of public instruction for Bengal in Jan. 1855, placed the presidency college on an improved footing, and in 1856 initiated the Calcutta University, the act of incorporation being passed in the following January.
A rebellion in June 1855 of the wild Santal tribes, who were suffering from the extortions of money-lending mahajans, was, in spite of preliminary protests from the supreme government, suppressed by martial law (Nov.-Dec). The Santal country was placed under special officers and the five districts named the Santal Parganas. Halliday was also faced by agrarian difficulties. By the Act of 1859 — known as the 'Magna Charta of the ryots' — he restricted the landlord's powers of enhancement in specified cases, gave occupancy rights to tenants of twelve years standing, and improved the law relating to sales of land for revenue arrears.
Bengal was not the chief centre of the Sepoy mutiny, but Halliday was closely associated with its suppression. His influence over the governor-general Canning was great, and to facilitate constant communication he removed from his official residence, Belvedere, to rooms overlooking Government House, Calcutta. There was no member of the government whom Canning 'so frequently consulted or whose opinions he so much respected' (Kaye). It was under his strong persuasion that Canning allowed British troops to replace the Sepoy guard at Government House in August (Sir H. S. Cunningham's Earl Canning, 1891, p. 126). In his final minute (2 July 1859) regarding the services of civil officers. Canning credited Halliday — the 'right hand of the government of India' — with effectually checking the spread of rebellion in Bengal, Halliday's 'Minute on the Bengal Mutinies' (30 Sept. 1858) gives full particulars of his activities (see Buckland's Bengal under the Lieutenant-Governors). He was included on 18 Mar. 1858 in the thanks which had been voted by both Houses of Parliament to the governor-general and others. He was also thanked by the East India Company (10 and 17 Feb. 1858), and the court of directors acknowledged his services in detail in a despatch dated 4 Aug. 1858. Retiring from the lieutenant-governorship on 1 May 1859, he was created (civil) K.C.B. a year later.
Halliday was inevitably exposed to the censure which Canning's clemency in restraining the spirit of revenge provoked. Halliday stoutly defended in an official minute his own educational policy, to which Sir George Russell Clerk [q. v. Suppl. I] and others attributed the revolt. But more persistent was a personal controversy in which Halliday was involved for some thirty years with a subordinate officer, William Tayler [q. v.], commissioner of Patna, Behar. With Tayler, Halliday's relations were strained before the Mutiny. Tayler had printed 'for private circulation' a violent 'Protest against the Proceedings of the Lieut.-Gov. of Bengal in the Matter of the Behar Industrial Institution' (Calcutta, 1857). Subsequently Halliday doubted the prudence of Tayler' s procedure at the opening of the outbreak, and with the approval of the governor-general removed him from his commissionership (4 Aug.). Halliday appointed a Mahommedan to be