Late in April 1931, disregarding doctor's advice that he needed six months to convalesce, Hailey returned to India. At once he was confronted by two crises: first, the aftermath of a horrible communal riot that had taken place in Cawnpore at the end of March; second, the catastrophic impact of the world-wide depression on the local agrarian economy. Also in April Irwin was replaced by Lord Willingdon, and though the new viceroy did not renounce the pact with Congress he was skeptical of it and intent on returning India to normalcy. Before the year was out civil disobedience would resume. The year 1931 would rank as one of the most intense, pivotal ones in the history of modern India. Although Hailey avoided public criticism of the acting governor, Sir George Lambert, who stayed on as finance member, he quickly became convinced that he had not returned a day too soon.

The Cawnpore riot had been triggered by the local Congress committee's pressure on Muslim merchants to observe hartal on 24 March, the day after the national hero Bhagat Singh was hanged in Lahore for the assassination of a Punjab police official. It was one of the worst communal conflicts of the entire interwar period, resulting in more than four hundred deaths and at least twelve hundred serious injuries.