Economic History of India

Semester V, Discipline Specific Elective, DSE -5-1A

Unit 1: IMPACT OF THE BRITISH RULE IN INDIA
Unit 1.3: ECONOMIC DRAIN
Dr. Purba Roy Choudhury
purba.roychoudhury@thebges.edu.in
The Bhawanipur Education Society College, Kolkata
Economic Drain in India
Introduction
 An analysis of drainage of wealth from India
under the British rule still remains one of
the main problems in the study of our
economic history.
 During the last quarter of the 19th century
a great controversy arose over the question
of „The Drain‟ between the nationalist
leaders of India and the Protagonists of
Britain.
 Indian nationalist thinkers developed the
theory of Drain mainly for analysing main
cause of poverty in India.
Introduction
 The main argument that was advanced in this
respect was that “a significant portion of
India’s national wealth was transferred to
England without any quid pro quo.”
 The experts described such „Drain‟ on India‟s
resources as the transfer of resources from
India to England either by getting nothing in
return or getting only disproportionately a
smaller part of such transfer of resources.
 The main exponent of the drain theory was
Dadabhai Naoraji.
Introduction
 He gave a fairly sophisticated account of
economic drain in 1871 in his book , “Poverty
and Un-British Rule in India” and identified it as
the basic characteristic of Indian colonial
economy.
 Dadabhai Naoroji tried to explain in his book
the causes of drain, to measure the extent of
such drain and to find the consequences of such
drain.
 Thus the British siphoning system adopted to
take away India‟s resources and wealth has been
termed as „The Economic Drain‟ by economists
like R.C. Dutt, Dadabhai Naoroji and others.
Concept of drain
 The central part of drain theory is that a
portion of the national production of India
was not available for the capital formation
or consumption by her own people.
 This portion was actually drained away to
England for political reason without any
adequate economic, commercial or material
return.
 In other words, it was an unilateral transfer
of resources from India to England.
Concept of drain
 Upto the battle of Plassey as Indian goods especially
cotton and silk products found a big outlet in the
West, and European traders had to bring bullion into
India, because they had practically no trading items
befitting Indian tastes and preferences.
 This losing of bullions to India was hardly tolerable.
The problem was solved dramatically after the
transfer of power in 1757.
 India went on passing all accumulated capital in Britain
by the way of plunder from Bengal, tributes, profits
from internal trade and a surplus from Dewani
revenue of Bengal.
 Thus profit making through trade became integrated
with administration.
Concept of drain
 The transfer of resources from India to England
and other countries in Western Europe, without
any adequate economic, commercial or material
return in the middle of the 18th century has been
described by many economists as a drain in Indian
resources.
 It was a unilateral transfer of wealth from India to
England.
 The drain referred to the unrequited surplus of
exports over imports which were transferred to
England.
 The drain was typically a phenomenon of the
colonial rule.
Concept of drain
 Dadabhai Naoraji tried to quantify the
magnitude of the drain and sought to prove
that the mass poverty in India was a direct
consequence of the drain in his study
entitled “Poverty and un-British Rule in
India”.
 Dadabhai Naoroji (4 September 1825 –
30 June 1917) also known as the "Grand
Old Man of India" and "official
Ambassador of India" was
an Indian Parsi scholar, trader and politician
who was a Liberal Party member of
Parliament (MP) in the United Kingdom
House of Commons between 1892 and
1895, and the first Asian to be a British MP.
Naoroji was one of the founding members
of the Indian National Congress and was
called the Father of Indian Nationalism
Concept of drain
 India did not receive any large influx of
foreign capital.
 She was left to develop her own resources
largely through her own exports while a
substantial part of her accumulated capital
funds found its way in Britain.
 In India an empire had been acquired by
the EIC and this empire had also drawn
their dividends and made their profits out
of the revenues of this empire.
Concept of drain
 When they ceased to be traders in 1834, it was
provided that the dividends on their stock should
continue to be paid out of the taxes imposed on
the Indian people and when finally the company
ceased to exist in 1858; their stock was paid off
by loans which were made into an Indian debt.
 The empire was thus transferred from the East
India Company to the Crown but the Indian
people paid the purchase money.
 The entire cost of wars and civil administration
etc. was paid out of the resources of India.
 Concept of drain
 However, it is important to note that even after
paying all these expenses, India showed a
substantial surplus.
 But the money went as a continuous tribute to
England to pay the dividend, there was an
increasing demand called the public debt of India.
 This added to the burden of the taxpayers who had
to pay the interest.
 The construction of various public works involving
huge money and salaries and pensions etc. to
British officials (Home Charges) was also done
at the expense of the Indian people.
Concept of drain
 By 1770, India with her favourable balance of
trade over a succession of years was the
beginning to fit the Classical economists‟
description of a chronologically indebted
country.
 If both nations had benefitted by the
founding of the empire in India, both nations
should contribute to the cost – India
paying for the administration of India
and Great Britain paying the Home
Charges.
Concept of drain
 But a different policy was
pursued from the
commencement of the
British rule in India and
the result was a
continuous economic
drain from India, which
had increased in volume
with the lapse of years
and had impoverished an
industrious, peaceful and
once prosperous nation.
Concept of drain
 Speaking about the drain, John Shore
wrote, “The halcyon days of India are
over; she has been drained of a large
proportion of her wealth she once
possessed and her energies have been
cramped by the sordid system of misrule
to which the interests of millions have
been sacrificed for the benefit of few”.
Concept of drain
 It refers to the economic critique of
colonial rule in India that was advocated
by the early nationalists.
 They described the constant one way
flow of wealth from India to England
for which India received no
returns as 'Drain of Wealth'.
 This occurs when gold and silver flow out
of a country as a result of an adverse
trade balance
Concept of drain
 Origins of Drain of Wealth
 In the 17th and early 18th centuries, the English
East India Company used to import bullion - gold
and silver to the tune of 20 million, and funds
from England for purchasing goods in India.
 These goods were then exported to Europe for
sale. After the Battles of Plassey (1757) and Buxar
(1764), the Treaty of Allahabad (1765) was signed,
which entitled the Company to collect land
revenue from the province of Bengal, the
Company began generating surplus
revenues (after paying the duties and tribute to
the Nawab of Bengal).
Concept of drain
 Origins of Drain of Wealth
 The Company used these revenues to
purchase goods in India which were then
exported for sale in Europe and elsewhere.
 It eventually eliminated the need for the
Company to import bullion and funds from
England to finance its operations in India.
 It resulted in a situation where Indian revenues
were used to purchase Indian goods which were
then exported out of India, without India getting
anything in return.
 This was the beginning of drain of India's wealth.
 Types of Drain
 Economic drain had two types: External and Internal
 External Drain accrued through unilateral transfer of
goods to England and would had been impossible without
an international trade.
 In order to meet the external trade commodities such as
food grains and raw materials were extracted from rural
areas by the oppressive land revenue.
 Irrigation rent, salt taxes and other taxes which
compelled the cultivators to sell their crops which were
exported.
 So there was a unilateral transfer of wealth from poor
rural areas to affluent urban areas. This was the internal
drain.
 Types of Drain
 These concepts of drain formed the core of “external”
economic drain which Naoroji made his own. The essence
of economic drain was the system through which the
“economic surplus in the functional sense, not in the sense
of superfluity was extracted out of poor colonial economy,
in the first instance, by a process of internal drain”, and
subsequently considerable part of the surplus was drained
out through excess of exports over imports.
 In other words, it was a net unilateral transfer of funds
from India to England with all its adverse pressure on
India‟s terms of trade. From this concept of economic
drain, one must draw a line of distinction between
“internal drain” and “external drain”.
Types of Drain
 The “internal drain” consisted in the transfer of
wealth from villages to the city, from backward
regions to rich regions within a country or from the
poor to the rich through the medium of taxation,
interest payments or amortization, profits and other
forms of surplus without equivalent return.

 According to Dadabhai, the “external drain” was a

drain because of “unrequited exports”, “non-
commercial exports” which brought no equivalent
return in the form of imports from India to Britain.
Dadabhai spoke of the economic drain as an internal-
cum-external drain, while R. C. Dutt had much
interest in external economic drain.
Types of Drain
 However, it will not be out of place to
remark here that external drain of wealth
in India would have been impossible
without an internal drain. Truly speaking,
internal economic drain may be regarded
as the contingent effect of external drain.
 Causes behind the Drain
According to Dadabhai Naoraji, the economic
drain from India arose because of the following
reasons:
 Remittances to England by European
employees for the support of their families
and education of children, a feature of the
colonial system of government.
 Remittances of savings by employees of the
Company since most employees preferred
to invest at home.
Causes behind the Drain
 Remittances for the purchases of British
goods for the consumption of British
employees as well as purchases by them
of British goods in India.
 Government purchase of stores
manufactured in Britain.
 Interest charges on public debt held in
Britain (excluding interest payments on
railway loans and debts incurred for
productive works)
 Causes behind the Drain
 The Government of India had to make huge
payments to people in England on account of
political, administrative and commercial
connections established between India and England.
These commitments were called “Home Charges”.

 Home Charges included interest on public debt

raised in England often at comparatively higher
rates, annuities on account of railway and irrigation
works and payments in connection with civil
department where Englishmen were employed.
 Causes behind the Drain
 Home Charges also included office expenses
in India including pensions to retired British
officials who had worked for India in England
and retired there, salaries to British officials.
 Home Charges were estimated to be 35
million pounds annually.
 East India Company had to fight many battles
with native rulers. For financing these wars
often the government raised loans in England.
Causes behind the Drain
 Also the cost of various expeditions to Persia,
Africa and other far-off countries, for the
expansion of the British Empire, had to be borne
by India.
 At the expense of India a good part of the British
army and navy was armed and made fit to fight in
foreign lands on the pretext that all such wars
and conquests were in the interest of India.
 Also the entire cost of laying the telegraph lines
from England to India was charged to India‟s
account and the burden had to be borne by the
Indian taxpayer.
 Causes behind the Drain
 There was an outright plunder and loot
by merchants and officials of the East India
Company and later of the British Crown.
 Thus after the Battle of Plassey, the EIC
demanded and obtained from the native
rulers several million pounds as gifts,
exactions, booties, tributes, etc.
 Causes behind the Drain
 Not only petty officials of the East India
Company made enormous profits by private
trading and by harassing Indian traders, but
also the government and Governor Generals
like Robert Clive and Warren Hastings made
enormously huge fortunes.

 Their one aim was to make as much money

as possible and as quickly as possible, shift all
this wealth to England and lead the rest of
life in luxury.
 Estimates and Measurement
 It is impossible to accurately measure the
amount of drain, which in the form of
resources and gold bullion flowed from India
into Great Britain during the long British rule
over India. Some idea of the extent of the
drain can be got by figures quoted by some
authors.
 First of them, Verelst estimated that within a
period of 5 years, after the Battle of Plassey,
goods and bullions worth 4941611 pounds
sterling went out of the country.
 Estimates and Measurement
 Dr. K. Dutta, quoting Dow states that
Bengal lost yearly to Europe 1 million 44
lakh 7 thousand 5 hundred (1447500)
pound sterling.
 J.C. Sinha stated that during 1757 and 1780,
the amount of drain on Bengal‟s resources
alone was something like 38 million pounds.
With the available information it was
calculated that 1/4th of all the revenue
derived in India can be annually remitted to
England as Home Charges.
Estimates and Measurement
 According to Dadabhai Naoraji, between
1814 and 1865, about 350 million pound
sterling went to England by way of drain. He
calculated this figure from India‟s export
surplus over her imports during those years.
 It should be noted that this figure exclude the
loot and plunder by vast number of petty
officials of the East India Company and by the
Governor and Governor Generals who
shifted it to England on personal account.
Estimates and Measurement
 Though different nationalist leaders estimated
the amount of the annual drain, there is
considerable variation in these estimates
because different authors adopted different
methods for calculating the drain and also
because India‟s export surplus was undergoing
colonial change in the upward direction.
 Dadabhai Naoraji‟s estimate of the drain
computed in 1867 was 8 million pound
sterling, in 1905 it was 51.5 crores.
Estimates and Measurement
 R.C. Dutt‟s estimates, which were the
modest of all estimates, maintained that the
drain was about 20 million per year during
the early years of the 20th century.
 Thus whatever the form of the estimate it
may be, the extent of loss suffered by India
was enormous and it aggravated the crisis
that the British had put into.
 Criticism of the Drain Theory
The refutation of the theory began almost
simultaneously with its enunciation.
 Some critics like Morrison and Lord Curzon
referred to the impact of bullion into India as a
proof of an inward drawn rather than outward
drain.
 The fact, however, is that India did not receive
adequate bullion in lieu of her export surplus.
 Besides, whatever bullion came was needed for
industrial and financial purposes.
 Criticism of the Drain Theory
 It was suggested that India‟s connection
with England enabled her to borrow in the
cheapest market.
 These critics forget that many of these
loans were not at all required by India and
most of them were not usefully employed.
 Moreover, even if a higher interest had to
paid on loans raised in India, at least it
would have remained and fructified in India
while even the lower rate of foreign loans
produced a drain.
 Criticism of the Drain Theory
 Anstey‟s argument that the railways and irrigation
works constructed with foreign capital were of
immense benefit to India does not carry much
conviction because their construction was
primarily undertaken to serve the wider interests
of England.
 That is why they destroyed more employment
opportunities than they opened up.
 Critics often compared India‟ position in respect of
her export surplus with that of U.S.A.
 America also had a great export surplus due to its
indebtedness to European countries and yet was
flourishing.
Criticism of the Drain Theory
Therefore, Morrison argues that the political state
of a country had nothing to do with the existence of
the export surplus.
In reality however, India‟s case was not comparable
with U.S.A. because except in the 1840s, America
was an importer of capital throughout the 19th
century.
Her export surplus increased only after 1873.
 Secondly, the export surplus of U.S. represented
deferred receipts. In the case of India, however, the
exports were not paying for past loans nor were the
surplus a future claim over other countries.
 Criticism of the Drain Theory
Regarding the remittance of savings and pensions
by Europeans employed in India, the critics agree
that India‟s case was different from other countries.
 Anstey‟s point that the charges were not large in
comparison to the services it received from efficient
official, is, a good government and peace and security
which she obtained at cheaper cost.
But in reality, a large part of the military and civil
services were maintained for purposes that secured
the British interest.
 Criticism of the Drain Theory
 Regarding the establishment of peace and security,
critics overtook the fact that India needed to be
defended only against the British imperialism.
 As against the advantage of employing British
citizens, there was the disadvantage of loss of skill
and experience and of a nation condemned to an
inferior status in its own country.
 As for the assertion that India received an
administration favourable to economic history of
India bears testimony to the hostility of the British
government towards the development of this
country.
 Criticism of the Drain Theory

 The fact is that a major portion of India‟s

debt was political in nature and useless,
inessential and unproductive in character.
 The cost of servicing this debt was an
obvious drain on the resources of India.
Consequences of the Drain
 The most important evil resulting from the
drain was impoverishment of the country.
 It meant a direct transfer of a part of the
domestic product to England.
 It checked and retarded capital accumulation
in the country by removing a large part of its
currently accumulated capital to a foreign land.
 In this respect, it was at least partly
responsible for India‟s inability to embark on
the path of industrialisation.
Consequences of the Drain
 This had an important, though harmful effect
on income and employment within the
country.
 R.C. Dutt has rightly observed that “when
taxes raised in a country are remitted out of
it, the money is lost to the country forever;
it does not stimulate her trades or
industries or reach the people in any form”.
 In short, the multiplier effects of the
expansion of investments were lost.
 Consequences of the Drain
 The drain facilitated the penetration and
exploitation of India by foreign capital.
 First, by preventing capital accumulation in India,
the drain permitted foreign capitalists to come to
the country without having to face indigenous
competition. They therefore monopolised and
reaped all the advantage of India‟s material
resources.
 Secondly, the drain acted as a major source of the
accumulation of British capital invested in India
because a huge part of the drain was brought back
to India as foreign capital.
 Consequences of the Drain
 As R. C. Dutt pointed out financially the drain was
met directly from the public revenues whose
largest constituent was land revenue.
 Through this mechanism, the peasant was forced
both to pay for the drain and to provide the
agricultural products through which it was
remitted.
 The result was that he was, on one hand starved
of food grains which he was expected to export
and, on the other impoverished by the heavy land
revenue.
 This starved land of productive capital resulting in
agricultural stagnation.
Consequences of the Drain
 Apart, from the direct loss resulting from
the unilateral transfer of capital, the drain
produced the secondary injury of
worsening India‟s terms of trade with
foreign countries by giving a compulsory
character to her exports.
 India had to depress the prices of her
exports to persuade foreign buyers to
purchase them.
 This was an additional loss to her.
Consequences of the Drain
 The government‟s concern for meeting its
ever increasing Home Charges was a
predominant factor in shaping India‟s
currency policy.
 For example, efforts to maintain the sterling
value of the rupee stable at an artificial rate,
refusal to accept devaluation as a measure
against world depression and refusal to stop
unprecedented exports of distress goods
etc…all arose from the concern of the
government to be able to pay “Home
Charges”.
Consequences of the Drain
 Exclusion of Indians from the government of their
country meant loss of experience and knowledge
of administration or legislation, of high scientific
and technical profession thereby preventing skill
formation of the country.

 To sum up, the drain is a remarkable illustration

of the operation of imperialism. It exposed the
exploitative nature of the British rule and, in the
process, it lays bare one of the most important
causes responsible for reducing the once
prosperous nation to a condition of abject
poverty and destitution.