Drain of Wealth: Economic Impact of British Colonial Rule | History Optional for UPSC (Notes) PDF Download

Drain of Wealth Theory

• Indian national leaders and economists described the constant flow of national wealth from India to England, with insufficient economic, commercial, or material returns for India, as the "drain" of wealth. This concept is known as the drain of wealth theory.
• This drain of wealth was considered by nationalist thinkers to be a significant cause of India's poverty.
• Economic drain was a fundamental aspect of the East India Company's administrative and economic policies.
• The colonial government exploited Indian resources—such as revenues, agriculture, and industry—not for India's development but for the benefit of Britain.
• If these resources had been utilized within India, they could have been invested to increase the income of the Indian populace.
• The drain of wealth was seen as an indirect tribute imposed by imperial Britain on India year after year.

Background

Mercantilist Concept and Economic Drain:

• According to the mercantilist concept, an economic drain occurs when gold and silver leave a country due to an unfavorable balance of trade.
• Before the Battle of Plassey, the East India Company had imported bullion worth £20 million into India to balance its trade deficit with India.

British Restrictions on Indian Textiles:

• The British government implemented measures to restrict or prohibit the import of Indian textiles into England.
• In 1720, the British government prohibited the wearing or use of Indian silks and calicoes in England, imposing penalties on weavers and sellers who violated this prohibition.

Early Drain of Wealth:

• After the Battle of Plassey, the situation reversed, and the drain of wealth from India to England began as the British gradually established monopolistic control over the Indian economy.
• The 'Drain of wealth' from India to England started after 1757, following the British East India Company's acquisition of political power and the granting of a 'privileged status' to its servants, allowing them to amass wealth through various means, including dastak,dastur,nazarana, and private trade.
• The East India Company, after expanding its territorial control in India, benefited from a recurring surplus derived from:
  (i) Profits from oppressive land revenue policies
  (ii) Monopolistic control over Indian markets
  (iii) Participation in inland trade by the Company’s servants
  (iv) Private trade by British Free Merchants
  (v) Exactions by Company officials

Private Fortunes and Remittance to Europe:

• During 1757-1766, individual Englishmen in Bengal received illegal presents and perquisites totaling no less than 50 million current rupees from princes and other individuals.
• This practice continued despite the prohibition imposed by the Court of Directors in 1766.
• Charges have been made against figures like Warren Hastings and his council supporter, Barwell, for violations after 1766.
• Private fortunes accumulated by the Company’s servants and other Europeans in India were remitted to Europe through various means, including sending diamonds and issuing bills of exchange on the East India Company or other European companies.

Responsibility of East India Company:

• The East India Company was directly responsible for the most serious drain on Bengal's capital.
• After the acquisition of Dewani in 1765, the Company purchased its investments from Bengal using the surplus territorial revenues of the province. This made the Company the supreme ruler of a rich and fertile kingdom, using its revenues for purposes unrelated to the well-being of the local people.
• The Company's Government in Bengal often provided financial assistance to the Governments of Madras and Bombay for their civil purposes and military campaigns, such as the First and Second Anglo-Mysore Wars and the First Anglo-Maratha War.
• Bengal fully financed the Company's China trade, which benefited the Company but not Bengal. This trade drained Bengal's resources through export of bullion, leading to a scarcity of silver in the province and contributing to currency issues in the late 18th century.
• The entire surplus was used by the Company as an "investment" for purchasing exportable items in India and elsewhere. India did not receive anything in return for these exports, marking the beginning of the 'Drain of Wealth.'
• This drain was a unilateral transfer of funds and became a central point of criticism by early nationalist leaders against British colonialism.
• Bengal was affected more than Madras and Bombay because the latter's incomes were less than their actual needs.

Amount of drain:

• There are various estimates of the total economic drain due to incomplete and conflicting contemporary records.
• According to Verelst, Governor of Bengal, during the five years after the grant of Dewani (1765), goods and bullion worth 4,941,611 million pounds left the country.
• Historian Dow noted around 1770 that Bengal lost 1,477,500 pounds sterling annually to Europe due to the drain.
• Modern historians estimate that between 1757 and 1780, the drain on Bengal’s resources was about 38 million pounds sterling, excluding other items.

Dadabhai Naoroji’s theory of the Drain of Wealth

Drain of Wealth Theory:

• Dadabhai Naoroji was the first to argue that poverty in India was not due to internal factors but was caused by colonial rule, which was draining India’s wealth and prosperity.
• The Drain of Wealth theory, which Naoroji initiated in 1867, was further analyzed and developed by others like R.P. Dutt and M.G. Ranade.
• In his book Poverty and Un-British Rule in India, Naoroji explained how Britain was draining India’s resources. He claimed that nearly one-fourth of the revenues raised in India were sent to England, which could have been reinvested in India to boost the people’s income.
• Naoroji viewed this drain as a major harm caused by British rule. He likened British rule to a “knife of sugar,” causing impoverishment without overt oppression.
• In 1880, Naoroji emphasized that it was not economic laws but the British policy that was harming India, through the drain of India’s resources to England.
• Following Naoroji, R. C. Dutt also advocated the Drain of Wealth theory in his 1901 book Economic History in India. He compared taxation by a king to moisture being returned to the earth as rain, whereas the moisture raised from Indian soil now benefits other lands more than India.

M.G. Ranade's Contributions:

• In 1899, M.G. Ranade published a book titled "Essay on Indian Economics."
• He discussed the drain of wealth and emphasized the need for heavy industry to foster economic progress.
• Ranade also believed that Western education was crucial for laying the foundation of an Indian nation.

Other Economic Critics:

• Other critics of colonialism included G.V. Joshi, G. Subramaniam Iyer, G.K. Gokhale, and P.C. Ray.

John Sullivan's Observation:

• John Sullivan, President of the Board of Revenue in Madras, remarked that the British system acted like a sponge, drawing up resources from India and squeezing them down in England.

Dadabhai Naoroji and Economic Nationalists:

• Dadabhai Naoroji and other economic nationalists identified several factors contributing to the external drain of wealth:
• "Home Charges": Payments for the Secretary of State and his establishment in London, as well as costs for training, pensions, and salaries of civilian and military personnel.
• Annuities: Payments related to railway and irrigation works.
• Guaranteed Interest: Interest on foreign investments in railways, irrigation, and other infrastructure.
• Indian Office Expenses: Including pensions for retired officials, military, and naval personnel.
• Remittances: Money sent to England by Europeans for their families or for purchasing British goods.
• Government Purchase Policy: Importing stationery from England.
• Interest on Foreign Debt: Debt incurred by the East India Company.
• Military Expenditure: Costs related to military operations.
• Undervaluation of Trade and Labor: Trade and Indian labor were significantly undervalued.

Amount of Drain

Drain Estimates by Indian Leaders:

• Indian leaders had different estimates of the economic drain from India, varying by person and year.
• The common method of calculation was the difference between exports and imports, but other factors were also considered.
• R.C. Dutt noted that half of India's net revenues were sent out of the country annually, estimating this at about £20 million per year in the early 20th century.
• Ranade claimed that over one-third of India's national income was taken by the British in various forms.
• Naoroji estimated the drainage at about £12 million per year, while William Digby calculated it to be £30 million annually.
• On average, this drainage constituted at least half of the total revenue income of the British Indian government.
• Dadabhai Naoroji stated that nearly one-fourth of the revenues raised in India(about £12 million per year) was sent to England.
• Modern historians estimate the drainage at about £17 million per annum in the late 19th and early 20th centuries, which was less than 2 percent of the value of India's exports during that period.

Impact on economy:

• The drain theory was based on broad economic reasoning, not just the export of money or goods.
• The drain negatively impacted the country's employment and income prospects.
• R.C. Dutt highlighted that when taxes are spent within the country, the money circulates among the people, benefiting trades, industries, and agriculture.
• Money sent out of the country does not stimulate these sectors or reach the people, leading to a lack of local economic growth.
• The drain depleted India's productive capital, creating a shortage that hindered industrial development.
• This process directly impoverished India and stunted capital formation.
• According to R.C. Dutt, the drain primarily resulted from land revenue, leading to the impoverishment of the peasantry.
• Dadabhai Naoroji argued that what was being drained was potential surplus that could have spurred greater economic development if invested in India.
• Recent historical writings suggest that India was not fully transformed into a capitalist economy under British rule.
• British policies failed to promote growth in various sectors, including agriculture, due to their colonial nature.
• A revisionist perspective claims that colonial India experienced overall positive economic growth, albeit with significant variations over time and across regions.
• Periods of growth (e.g., 1860-1920) and prosperous regions (e.g., Punjab, coastal Madras, western Uttar Pradesh) highlight this variation.
• Stagnation in certain areas was largely due to the government's insufficient investment in critical resources like irrigation, education, and healthcare.
• The presence or absence of these resources played a crucial role in determining regional development.

Constituents of drain of wealth

Home Charges:

• “Home charges” refer to the expenses for the Secretary of State and his staff at the India Office in London, as well as the pay, pension, and training costs for civilian and military personnel—essentially, “the men who ruled India.”
• Before the Revolt of 1857: Home charges varied from 10% to 13% of India’s average revenues.
• After the Revolt: Home charges increased to 24% during the period 1897-1901.
• In 1901-02: Home charges amounted to £17.36 million.
• During 1921-22: Home charges sharply rose to 40% of the total revenue of the Central Government.
• Other components of Home charges included:
• Dividend to East India Company shareholders
• Interest on Public Debt:
• The East India Company accumulated a public debt to displace Indian rulers.
• By 1900, the public debt had increased to £224 million.
• Only a portion of the debt was used for productive purposes, such as building railways, irrigation facilities, and public works.
• Civil and Military charges:
• These included payments for pensions and furloughs of British officers in civil and military departments in India, expenses for the India Office in London, and payments to the British War Office. These charges were entirely due to India’s subjugation to foreign rule.
• Store purchases in England:
• The Secretary of State and the Government of India bought stores for the Military, Civil, and Marine Departments from the English market.
• The annual average expenditure on stores ranged from 10% to 12% of the Home charges between 1861-1920.

Council Bills:

• Council Bills were a means of transferring money through the sale of these bills in London to purchasers of Indian goods, causing a drain of wealth.
• Definition of Council Bills as explained by Sir John Strachey:
• The Secretary of State draws bills on the Government treasury in India.
• These bills are paid in India out of public revenues, providing merchants with the money they need in India and the Secretary of State with the money required in England.

Process of Council Bills:

• British purchasers of Indian exports buy Council Bills from the Secretary of State in exchange for sterling, which is used to meet Home Charges.
• The Council Bills are then exchanged for rupees from the Government of India’s revenues.
• The rupees are used to buy Indian goods for export.
• Conversely, British officials and businessmen in India buy Sterling Bills in exchange for their profits in rupees from British-owned Exchange Banks.
• The London branches of these banks pay in pounds for such bills with money from Indian exports purchased through rupees obtained from the sale of Sterling Bills.

Interest and Profit on Foreign Capital Investments:

• Interest and profits on private foreign capital were significant leakages from the national income stream.
• Foreign capital entered the Indian market in the late 19th century due to the expansion of railways, growth of trade, and establishment of plantations, mines, and mills.
• Foreign capitalists were primarily focused on exploiting Indian resources for their gain and hindered indigenous capitalist development.

Foreign Banking:

• India had to make substantial payments for banking, insurance, and shipping services to foreign companies.
• The unrestricted activities of these foreign companies not only drained Indian resources but also stunted the growth of Indian enterprises in these sectors.

British Response

British Justification for Economic Drain:

• The British argued that the economic drain from India was a payment for the services of capital and personnel, not a one-sided exploitation.
• They claimed that some of the expenditure was aimed at promoting economic development in India, similar to the development seen in the West.
• India was integrated into the larger capitalist world market, which was seen as a step towards modernization.
• Foreign loans and investments were primarily directed towards developing infrastructure, integrating internal markets, and modernizing the Indian economy.

Sir John Strachey's Perspective:

• In 1888, Sir John Strachey stated that England received nothing from India except compensation for services rendered and capital expended.
• The export surplus was attributed to invisible exports like shipping services and insurance charges.

Benefits Received by India:

• In exchange for the interest paid to British capital, India received railways, irrigation works, and plantation industries.
• For the Home Charges, India received efficient administrative services and security against external threats.

Nationalist Response:

• Indian nationalists did not accept the high price paid for these benefits.
• British capitalists exported not only the legitimate interest on their investments but also the entire profits.
• British pensioners spent their pensions in England, further contributing to the economic drain.

 Impact of the Drain Theory on Economic Nationalism and Critique of Colonialism

• The Indian national movement, unlike other colonial national movements, was deeply rooted in understanding colonial economic domination and exploitation.
• Moderates of the early 19th century were the first to develop an economic critique of colonialism, which became a significant contribution to the national movement.
• The themes of this critique were later popularized through various means like lectures, pamphlets, newspapers, dramas, songs, and prabhat pheries, forming the core of nationalist agitation.

Disillusionment of Indian Intellectuals:

• Initially, Indian intellectuals in the 19th century had a positive view of British rule, believing that Britain would help modernize India.
• Despite recognizing the drawbacks of foreign domination, early nationalists supported colonial rule, expecting it to transform India akin to Western nations.
• Post-1860, disillusionment grew as the reality of India’s social development did not align with their expectations. They observed slow progress and overall regression.
• Their perception of British rule darkened over time, leading to a deeper investigation into its impact on India.

Economic Analysis of British Rule:

• Leaders like Dadabhai Naoroji, Justice Mahadev Govind Ranade, and Romesh Chandra Dutt scrutinized the economic record of colonial rule since 1757.
• Romesh Chandra Dutt, in his work The Economic History of India, detailed the economic impact of colonial policies.
• These leaders, along with others like G.V. Joshi, G. Subramaniya Iyer, and G.K. Gokhale, analyzed colonial economic policies and their effects on India’s economy.
• Their analysis led to the conclusion that colonialism was the primary obstacle to India’s economic development.

Colonialism and Economic Transformation:

• Colonialism evolved from direct plunder and tribute to more subtle methods like free trade and foreign capital investment.
• 19th-century colonialism focused on transforming India into a supplier of raw materials and foodstuffs, a market for British manufacturers, and a field for British capital investment.

Role of Early Indian National Leaders:

• They were both learners and teachers, organizing intellectual agitations against official economic policies.
• Used bold and colorful language in their agitations.

Nationalist Economic Agitation:

• Started with the assertion of poverty in India, seen as man-made and removable.
• R.C. Dutt emphasized that India’s poverty was due to economic causes.
• Poverty was framed as a national development issue, uniting various regions and sections of Indian society.

Focus on Industrialization by Moderates:

• Economic development was centered on the rapid development of modern industry.
• Early nationalists believed in transforming the country through modern technology and capitalist enterprise.
• Industrialism was viewed as a superior stage of civilization.
• Ranade argued that factories could revitalize national activities more effectively than schools and colleges.
• Modern industry was seen as a unifying force for India’s diverse peoples.
• Surendranath Banerjea’s newspaper,The Bengalee, highlighted the importance of commercial union and industrial activity in forming a strong Indian union.
• All other economic issues were viewed in relation to the paramount goal of industrialization.

Early Nationalists' Views on Industrialization:

• Early nationalists believed that India's industrialization should be based on Indian capital rather than foreign capital. They viewed foreign capital as harmful, arguing that it exploited and impoverished the country.
• They claimed that foreign capital replaced and suppressed Indian capital, drained resources, and strengthened British control over the Indian economy.
• According to them, relying on foreign capital for development was a short-sighted trade-off of future growth for immediate gains.
• They emphasized that genuine economic development could only occur through Indian-led industrialization.
• In addition to economic concerns, they recognized the political implications of foreign investment, which created vested interests that perpetuated foreign rule.

Problems Highlighted by Moderates:

• The decline and ruin of India's traditional handicrafts due to British policies favoring British manufacturers.
• Criticism of the pattern of foreign trade and railway construction, which the British hailed as progress but the nationalists saw as detrimental to indigenous industries.
• Foreign trade was criticized not for its volume but for its export of raw materials and import of manufactured goods, harming national industry and agriculture.
• Railways were seen as benefiting British industries more than Indian needs, leading to a commercial rather than an industrial revolution.
• Criticism of the policy of free trade, which harmed Indian handicrafts and forced nascent industries into unfair competition with developed Western industries.
• Critique of the colonial pattern of finance, where taxes burdened the poor while the rich, especially foreign capitalists, were favored.
• Call for a more equitable pattern of expenditure, focusing on developmental and welfare needs rather than imperial interests, such as high military spending for imperial control.

Drain Theory

• Central to the nationalist critique of colonialism.
• Emphasized how British rule drained India of productive capital needed for agriculture and industry.
• Represented the peak of nationalist leaders' integrated economic analysis of colonialism.
• Made the exploitative nature of British rule visible.
• Politically effective as it resonated with the largely peasant population.
• Highlighted the idea that Indian taxes were used to benefit people in distant lands.
• Integral to modern colonialism and the conflict between Indian people and British imperialism.
• Gained prominence in nationalist political agitation during the Gandhian era.

Effects of Economic Critiques:

• Agitation on economic issues weakened the ideological grip of colonial rulers over Indian minds.
• Political security of any regime relies on people's faith in its moral purpose and benevolent character.
• British power in India stemmed from both physical and moral force, with the latter rooted in the belief that the British were the well-wishers of Indians.

Nationalist economic agitation:

• Undermined these moral foundations.
• Challenged the British justification of economic development as a benefit of their rule.
• Asserted that India's economic backwardness was a direct result of British exploitation.
• Poverty and backwardness were seen as inevitable outcomes of colonial rule.
• The decline of faith in British rule gradually extended into the political arena.
• Through their economic activism, nationalist leaders began associating crucial economic issues with India's politically subordinate status.
• They concluded that pro-Indian and developmental policies would only be implemented under a regime where Indians held political power.
• As a result, even though early nationalist leaders were generally moderate and still professed loyalty to British rule, they undermined the political foundations of the empire.
• This shift was a significant reason why the period from 1875 to 1905 became marked by intellectual unrest and a growing national consciousness.
• While late 19th-century nationalists focused on sharing political power and controlling finances, by 1905, many were advocating for some form of self-government.
• Dadabhai Naoroji was at the forefront of this shift:
• At the International Socialist Congress in 1904, he called for self-government and equal treatment of India with other British colonies.
• In the 1905 Indian National Congress session in Benares, Naoroji emphasized that self-government was the solution to India's problems.
• As President of the 1906 Congress session in Calcutta, he set the national movement's goal as "self-government or Swaraj".
• Thus, early nationalists grounded their nationalism in a detailed scientific analysis of colonialism's economic mechanisms.
• 20th-century nationalists built upon these themes in their critique of colonialism.
• With this strong foundation, they organized powerful mass agitations and movements, remaining steadfast in their anti-imperial stance.
• Naoroji estimated the per capita income of Indians at Rs. 20.
• Digby's estimate was Rs. 18 for 1899, while the government did not accept these figures.
• In 1882, Ripon's finance secretary estimated it at Rs. 27, and Lord Curzon in 1901 at Rs. 30.
• However, famines and epidemics during this period told a different story.
• Economic nationalism sparked various economic demands from moderates.
• The moderates proposed measures such as:
  (i) Reducing expenditure and taxes.
  (ii) Reallocating military charges.
  (iii) Implementing protectionist policiesto safeguard Indian industries.
  (iv) Lowering land revenue assessments.
  (v) Extending the Permanent Settlement to ryotwari and mahalwari regions.
  (vi) Promoting cottage industries and handicrafts.
• However, none of these demands were met.
• The income tax, which had been abolished in the 1870s, was reimposed in 1886.
• The salt tax was increased from Rs. 2 to Rs. 2.5.
• A customs duty was introduced, but it was countered by a matching excise duty on Indian cotton yarn in 1894.
• This was later reduced to 3.5% in 1896.
• The Fowler Commission artificially fixed the exchange rate of the rupee at a high rate of 1 shilling and 4 pence.
• There was no significant change in the agricultural sector either.
• Colonial experts like Alfred Lyall believed that Indian agriculture had progressed beyond its stationary stage.
• Consequently, the moderate economic agenda remained largely unfulfilled.