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 scholarsdefended 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 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 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 capitalinvested 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.
  • 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.
  • V. Joshi looked upon the drain as a loss of capital and added another dimension to the nationalist understanding. Joshi said that the drain 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.
  • 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.
  • 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 scholarsMorrison 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 –
  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.
  • 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, 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 19th 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 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.
  • 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.
  • 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. 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 20th 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 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.

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.