DRAIN OF WEALTH

QUESTIONS –

2005 – Is the ‘Drain of Wealth’ theory an adequate characterization of the

impact of Colonial Rule on the economy?

2007, 2009 – Short Note: Drain of Wealth

INTRODUCTION –

The theory of drain of wealth, developed by the Indian thinkers like Dadabhai
Naoroji and R.C. Dutt, was based on the constant need of the British
government for a unilateral transfer of India’s wealth to England, for
which India got no adequate economic or material returns. The drain took
the form of excess of exports over imports or unrequited exports since
India did not get any share of the profits made upon the sale of goods in
European markets. India was compelled to pay an indirect tribute to
England and its payment laid the foundation for the evolution of the theory of
drain of wealth from India. The explanations of the apparent lack of growth
and development in the Indian economy during the colonial period were
dominated by the nationalist critique of British rule and the imperial
response to it. The question of the drain generated a debate that began in the
1860s with a critique of the British government by the Nationalists who were
supported by the Marxists. On the other hand, imperialist scholars
defended the drain of wealth by the British.

NATIONALIST VIEW –

 The nationalist argument put forward by Dadabhai Naoroji and R.C.

Dutt focused on the distortions to the Indian economy brought about
by the drain of Indian resources to Britain by the colonial rule and by
the impoverishment of the population over the course of the 19th
century. The nationalist case was underpinned by assertions that
British rule had destroyed a successful and smoothly functioning
pre colonial Indian economy in the late 18th and early 19th centuries.
Therefore the nationalist view was based on the twin assumptions that

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 decline outweighed growth and that this was an outcome of British
colonial policies.

 Dadabhai Naoroji first put forward the idea that Britain was extracting
wealth from India in his book ‘Poverty and Un-British rule in India’.
According to Naoroji and the nationalist leaders the most important
constituent of the drain was the remittance to England of a part of their
salaries and savings by English employees and the payment in England
by the Government of India of the pensions and allowances of the
English officials. Dadabhai saw the income that they enjoyed as a moral
drain.

 Another major fountainhead of the drain from India was that of the
administrative and military expenses or Home Charges of the
Government of India in Britain. The home charges included interest on
public debt raised in England, annuities on account of railway and
irrigation works and payments in connection with civil
departments where Englishmen were employed. Home charges also
consisted of the cost of military and other stores supplied to India.

 The third major source of the drain was the profits of private foreign
capital invested in trade or industry in India. Thus Dadabhai Naoroji
emphasized the drain of wealth of India through its export surplus as
well as in the form of profits on external trade.

 R.C. Dutt, in his book ‘The Economic History of India’, argued that the
drain had impoverished the country and depleted its resources
leading to widespread poverty of the masses. Dutt said that the high
revenue demand had forced the peasants to produce cash crops instead
of food crops, which in turn increased the risk of famines. Thus India
was converted into an agricultural colony and her wealth drained
since India was forced to export raw materials and food grains and
import British manufactured goods.

 G.V. Joshi looked upon the drain as a loss of capital and added another
dimension to the nationalist understanding. Joshi said that the drain

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 should be regarded not as a proportion of the annual gross national
product, but as a proportion of the annual net potential surplus or
saving. He held that the insufficiency of working capital available in
India for industrial purposes was in part due to the absence of any large
accumulation of capital, which was partially the result of capital loss
from India to Britain.

 Apart from Dadabhai Naoroji and R.C. Dutt other nationalist leaders
rose to point out the evils of the drain. These included Justice Ranade,
Bholonath Chandra, Madan Mohan Malaviya, G.K. Gokhale and
Surendranath Banerjea who joined in the stream of agitation around the
question of the drain. Among the nationalist newspapers, the Amrita
Bazar Patrika put forward the drain as the one cause of India’s poverty
and then repeated the assertion again and again over the years. The
drain theory was officially adopted by the Indian National Congress at
its Calcutta session in 1896.

IMPLICATIONS

 The most important evil attributed to the drain was that of

impoverishing the country. Dadabhai Naoroji declared the drain to be
the principle and even the soul cause of the suffering and the poverty of
India. It was argued that the drain was injurious mainly because the
accumulation of capital in the country was being checked and retarded
by the removal of a large part of its capital to a foreign land.

 The Indian leaders considered the drain not only as a loss of wealth but
also a loss of capital. It was argued that the drain was injurious mainly
because the accumulation of capital in the country was being checked
and retarded by the removal of a large part of its capital to a foreign
land.

 Some of the Indian leaders also pointed out that the drain represented
not only the spending abroad of certain portion of national income but
also the further loss of employment and income that would have been
generated in the country, if the drain would have been spent internally.

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  Moreover, these nationalists also said that the drain hindered industrial
development. In large scale industry, the colonial rulers used unfair
policies to hamper India’s development, producing a shortage of capital
that resulted in industrial retardation.

 The nationalists further argued that the drain facilitated the exploitation
of India by foreign capital.

MARXIST VIEW –

 Marxist historians supported the nationalist ideas but put forward

their own framework to study the drain of wealth. Karl Marx spoke of a
theory of dependency which asserts that the economy of each colony
is forced to follow a path of development that is designed to benefit the
economy of the Imperialist country. Colonial rule was thought to have
distorted the developmental base reached by domestic industry and
agriculture in the 18th century and then suppressed the entire economy
in the 19th century by the mechanism of the drain of wealth.

 Paul Baran in his work ‘Political Economy of Growth’ revived the

notion that the British rule had broken up pre existing self sufficient
agricultural communities and forced a shift to the production of
export crops, distorting the internal economy. According to Baran, the
colonial drain was a mercantilist concept as India’s loss of economic
resources and their transfer to Britain was a consequence of political
subordination.

 Amiya Bagchi and Hamza Alavi argue that that British rule brought
about a process of economic change that broke down the economy of
independent handicraft workers and self sufficient peasants and
directed domestic activity towards two main areas – export oriented
agriculture and limited industrialization. In his book Capitalism and
Colonial Production, Hamza Alavi notes that the economic drain from
India has not only been a major factor in India’s impoverishment it has
also been a very significant factor in the Industrial Revolution in Britain.

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  Irfan Habib said that the drain of wealth had two important
repercussions – the disruption of Indian trade surplus and the changed
role of Indian tribute in the economy of England. Since the rate of
growth, capital formation and the technological rate of industry were
slow in Britain; the flow of resources from India played a major role.
However the extent of the drain and its significance for Britain has been
questioned. Chris Bayly critiques the above view and says that only
between 5-15 percent of Britain’s resources came through exploitation
of the British colonies which is extremely insignificant.

IMPERIALIST VIEW –

 The nationalist argument was attacked by the official and non official
spokesmen, advisers and defenders of the British regime. The
British refutation of the drain theory began with the critique by
Theodore Morrison in his ‘The Economic Transition in India’, which
was perhaps the best exposition of the point of view of the critics.
Morison defined the drain as the amount of India’s exports in goods or
money for which in that year she receives no material equivalent. Thus
the main difference between the critics and the proponents of the
drain theory lay in their understanding of the exact meaning, origin
and consequence of this unrequited export surplus.

 Colonial scholars Morrison and Vera Anstey didn’t regard the drain
as impoverishing India and argued that most of India’s payments to
Britain were made in return for services or capital that increased the
wealth of the local economy. The tribute was thus a small proportion of
the overall benefits of colonial rule. Anstey further said had there been
no home charges and India had provided for her own military and
defence, India would have had to pay more. Bipan Chandra has
however criticized this argument, saying that the need for foreign
capital arose only because India’s own capital had been drained out.
Thus foreign capital replaced, and not augmented, India’s own capital.

 The attack on the drain theory by the imperial apologists included the
following –

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 1. It was said that the Indians overrated and exaggerated the drain.

2. India received adequate economic equivalents for the excess

exports. The biggest part of the drain arose on account of interest
on borrowed capital, which in turn represented economic
development and enrichment of India and not its
impoverishment.

3. As far as the home charges were concerned, the critics agreed that
India’s case was a peculiar one. However, these charges were not
large and what was more important was that India received as
compensation for them the services of hardworking, selfless and
efficient British officials and non economic welfare in the form of
peace and order, modern administration and security against
external aggression.

 R.W.Goldsmith too defended the British Rule. He argued that the

economy was stagnant in the two centuries prior to 1860, contradicting
the Nationalists views that the Indian economy was flourishing until the
British government took control of India. After 1860, Goldsmith
contends that despite the absence of growth, this period cannot be
labeled as one of stagnation because it was marked by the development
of a modern sector consisting of railroads, light industries and banks.
Goldsmith feels that the British cannot be accused of retarding the
development of the Indian economy.

 In their revisionist critique of the Nationalist position, K.N.Chaudhuri

and B.R.Tomlinson, injected a new strand into the debate when they
argued that the notion of unrequited exports was unjustified and a non
issue.

 Tomlinson argued that although taxation in India increased

substantially towards the end of the 19 th century, agriculture was not
the primary reason. A great increase came from non agricultural
taxation such as tariffs, excises and the income tax. Moreover, the
increased tax burden was partly due to the devaluation of the rupee

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 against the pound sterling. He also asserted that the inflow of bullion
meant that some Indians were increasing their assets during the
colonial period. This was important since the central contention of the
drain theory in its original form was that British rule removed any
investible surplus above subsistence from India.

 K.N. Chaudhuri opposed the Nationalist attempt to explain poverty and

stagnation in the colonial period in context of British exploitation.
According to him exploitation in the relationship between a primary
producing country and a manufacturing country, in which the former is
always at a disadvantage always existed. He argued that the tributes
paid by India were home charges and therefore the term unrequited
exports was inappropriate. Chaudhuri also asserted that in the long run
it was not so much the capital payments as the absence of active
measures for economic development which were responsible for the
continuing poverty of India.

NATIONALIST REPLY TO THE ABOVE –

 The ideologues of the drain theory – the nationalists and above all
Dadabhai Naoroji, countered nearly all the points made by their critics.

 The Indian reply to the assertion that a major part of the drain
represented interest on productive public debt and profits for foreign
enterprises and therefore implied economic development of India was a
multi pronged one.

 They pointed out that foreign capital was not essential. The need for it
arose because India’s own capital had been drained out by its rulers. In
reality, therefore foreign capital replaced and not augmented India’s
own capital. The Indian leaders contended that foreign capital was
injurious to the country since it suppressed indigenous capital and
prevented its useful employment by tending to monopolize the
industrial field. Therefore in general, foreign capital stood not for
development and enrichment of India but for its exploitation and
impoverishment.

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  The Indian leaders further pointed out that a part of the Indian public
debt was entirely political in nature and inessential and unproductive in
character and that there was no economic equivalent in return for it.
One part of the drain theory the nationalists could not excuse under any
circumstances was the expenditure on British employees of the
Government of India. Payment for their services was precisely the
heart of the drain theory. There was no economic or material return
and the Indian leaders denied that the drain under this head was
compensated for by non economic services rendered. These
services were not essential to India and were in fact not needed by India
since they could be performed equally well and more cheaply by Indians
themselves.

 The nationalists also pointed out that a large part of the military and
civil services of the government of India were maintained not for India’s
benefit but for purposes that served the interests of Britain and its
citizens.

 As to the final assertion of the critics of the drain theory that in return
for the drain, India received an administration that was favourable to
economic development, the entire national leadership rose up in
protest. They all agreed that the British administration in India was
detrimental to the economic growth of the country.

 The above analysis of the drain theory and its defence by its advocates
clearly brings out the fact that, for them, the theory was not an isolated
criticism, but was intricately linked up with nearly every aspect of the
economic policies of the Indian leadership. It was used to bring into
focus the entire nationalist critique of the official economic policies and
to bring to light the exploitative character of British rule in India.

REVISIONIST VIEW –

 An important revision of the Nationalist theory came with the work of

Sunanda Sen. While agreeing that there was a drain of wealth from
India to Britain she faulted the early nationalists on two main grounds.

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 Firstly, she said that it was illogical to argue that India’s export
surpluses remained unpaid. Revenue against such surpluses was duly
remitted and was paid out via the intermediation of exchange banks to
exporters in India. Secondly, she held that the drain took place through
the mechanism of the Home Charges, the annual value of which was
around 18 million pounds by the turn of the 20 th century. Sen argued
that most of India’s expenditure abroad was political in origin and was
avoidable in the absence of colonial rule.

 Another important revisionist work within the Marxist tradition is Utsa

Patnaik’s study. Patnaik asserted that the unilateral transfer of a part of
the revenues collected in India required the transformation of this part
into forms useful to the metropolis. This included either commodities
directly usable in Britain as raw materials and wage goods, or
exportables to third countries which earned foreign exchange for
Britain. Therefore Indian producers were expected to produce a surplus
of commodities for export to Britain, without any corresponding
payment in foreign exchange. Paradoxically, despite a rising export
surplus, India had to import capital itself, in order to sustain the rising
unilateral transfer to Britain. Patnaik calls this situation an export led
retardation.

 Tirthankar Roy made a phenomenal contribution to the understanding

of the drain theory and disputed the leftist-nationalist paradigm on
many grounds. Firstly, he points out that the view that
commercialization could have been a more powerful stimulus for
growth if colonization had not intervened is difficult to accept. Secondly,
Roy argues that there is no empirical evidence for net decline in the
colonial period. Research shows the India experienced positive growth
in this period, which was faster and spread over a wider area vis-à -vis
pre-colonial India. Lastly, Roy says that Leftist-Nationalists have ignored
the other factors that can be held responsible for absence of growth.
There is a need to take into account the role of regional and local
characteristics and peculiarities since stagnation was periodic and
regional.

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CONCLUSION –

 In conclusion, though the theory of the drain of wealth has been

criticized and revised by subsequent historians, it made an important
contribution in terms of explaining the poverty in India. It must also be
remembered that apart from the economic implications of the theory,
its real importance lay in its political implications, as it enabled the early
Nationalists to assert that India’s economic backwardness was due to
India’s political position – being ruled by a foreign power.

 The drain of wealth argument was in a way a political tool for early
Nationalists. Further, it is important to view this theory in conjunction
with other factors such as the absence of measures for economic
modernization within India or the expropriation of capital by a parasitic
elite, that led to backwardness in British India in the form of slow
industrial development, stagnant growth of agriculture and the
subsequent poverty within India.

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