1. What is the drain of wealth theory? In what way have recent writings modified the Nationalist view?

Ans. The drain of wealth theory, together with deindustrialization, formed the central theme of the Nationalist critique of the exploitative nature of British rule in India. The apparent lack of growth and development of the Indian economy during the colonial period led to a debate about the role of British government in this regard. The debate began in the 1860s with a critique of the British government by the Nationalists. They were supported by Marx and proponents of the ‘dependency theory of development’. On the other hand, Imperial apologists such as Morison and Anstey defended British rule. In modern times, this debate has been carried on by scholars who support either the Nationalist view (such as B.M. Bhatia and Surendra Patel) or the Colonial view (such as Goldsmith and Tomlinson). Certain neo-liberal revisionist scholars like K.N. Chaudhuri, Utsa Patnaik and Sunanda Sen have also further developed both views. This essay will attempt to analyze the main arguments involved in this debate.

It must be remembered however that the term ‘drain’ itself is a matter of contention. There are differences in the definition of this term (and not its measurement) between the different scholars, depending on the position adopted by them. The problem is about what is to be regarded as drain – the outflow of all resources or specific resources; or whether it is to be a general critique of colonial exploitation. The Nationalist critique is a general critique of the exploitative British rule, and of the outflow of resources in terms of ‘unrequited’ exports. But there is again a dispute over what constitutes ‘unrequited’ exports. Thus it is essential to keep in mind the differences in the formulations of the concept of ‘drain’ itself.

The Nationalist school, led by Moderate Congressmen, laid the foundation of the debate between the 1860s and 1905, when its spokespersons Dadabhai Naoroji and R.C. Dutt first spoke of the abuses suffered by the Indian economy as a direct consequence of British rule. This was, however, different from the earlier racial critique of British rule. These scholars argued that India was a flourishing economy prior to British imperialist penetration. The blame for the subsequent lack of progress and persistent backwardness was put on British rule. The Nationalist view was based, therefore, on two assumptions – that decline outweighed growth; and that this was an outcome of British colonial policies.

The focal point of the Nationalist critique was the process by which Indian resources were “drained off” by the mechanism of British rule. R.C. Dutt, Irfan Habib and N.K. Sinha have argued that the drain of wealth had started in the late 18th century, from 1765 onwards, when the ‘revenue surplus’ of Bengal was transferred to England either in the form of treasure, or investment (it was used to buy Indian commodities to sell in England with huge profit margins), or investment for the triangular trade between India, Africa and England. This theory was, however, not purely the work of the Nationalist intelligentsia, though they were its most vocal exponents. Tributes from India had increased to significant proportions by the early 19th century and a large number of British civilian officers were concerned about the large inflow of funds from India. This was indicated by the sharp criticism from British officials like Sir George Wingate, who pointed at the “tribute paid to Great Britain as the most objectionable feature in our existing policy”. This helped the Indian Nationalists to articulate their position, which challenged the legitimacy of the British Empire in India.

By the last quarter of the 19th century, the drain took other forms since there was no longer any revenue surplus. At this time, India was the largest purchaser of the British exports, a major employer of the British civil servants at high salaries and an important source of the Empire’s armed forces, all of which were financed by local revenue. The main form that the drain took, however, was that of excess of exports over imports, for which India got no economic or material return. Naoroji called them ‘unrequited’ exports since India did not get any share of the profits made upon the sale of goods in European markets. This was, in fact, the essential difference between British rule and earlier rulers like the Marathas or the Mughals – they too had accumulated wealth, but that had stayed within the country. However, the British carried out a continuous drain and exported part of India’s national wealth to England, without India getting any adequate return.

Dadabhai Naoroji provided one of the earliest versions of the Nationalist argument in his work ‘Poverty and Un-British Rule in India’. He emphasized the drain of wealth from India through its export surplus (which he thought to remain unpaid or unrequited from the angle of domestic economy) as well as in the form of the profits on external trade. Similarly, prices and services (the interest on the investment by the British in India had to be paid in sterling on an annual basis, which depressed the commodity prices) also played a role. Further, according to Naoroji, the surplus was appropriated by exchange banks, agency houses and shipping and insurance companies which were a monopoly of the Europeans. These profits ranged from 15-20% of the export earnings during 1883-1892 and were entirely appropriated by the Europeans. Imports were also overpriced by at least 10% during these years. However, this notion of trade was difficult to quantify. Since profits in external trade and the overcharging of imports were subject to varying degrees of monopoly exercised by traders, they were difficult to measure. Finally, the profits of private European capital invested in industry and trade in India also made up part of the drain. The total, according to him, ranged between 20-30 million pounds. In 1876, Naoroji computed the drain between 1870 and 1872 at £27,400,000 annually.

The other major component of the drain was the administrative and military expenses of the Indian government in Britain, described as ‘Home Charges’. This included payment of interest on the Indian public debt and on the guarantees for the railways; the regular expropriation as well as remittance to Britain of a significant portion of the incomes, salaries and savings made by English civil and military employees and professionals like doctors and lawyers (called “moral drain” by Naoroji); the payment of pensions and leave allowances to European government officials; the cost of military and other stores provided to India (mainly for the benefit of Europeans employed there); and the civil and military charges paid in England on account of India.

Naoroji also spoke of internal drain, i.e., the flow of resources within the country in a particular direction. He maintained that some regions were exploited more than others by the process of colonial rule; this affected the internal distribution of resources within the country as well as the social structure.

A.K. Banerji stressed the need to look at the drain of wealth from an alternative angle. According to him, political leverage enjoyed in colonial India was clearly an important factor behind the ability of the British to extract monopoly profits and to earn high salaries. Thus the Indian government was committed, despite financial stresses in the domestic economy, to meet a variety of overseas expenses, most of which had their origin in the political subordination of India. This alternative notion of drain was potentially capable of capturing the element of compulsion in the colonial economy, to procure net export surpluses in order to make them available for settling the overseas liabilities.

R.C. Dutt, another proponent of the theory of drain of wealth, argued that the drain had impoverished the country and depleted the country’s resources, leading to widespread poverty of the Indian masses and famines in the 1870s and the late 1890s. According to him, the high revenue demand in cash had forced the peasants to produce cash crops instead of food crops, which had increased the risk of famine. This combined with the significant export of food grains like rice and wheat, which had increased from £7.9 million in 1877 to £9.3 million in 1901. In this way, India was converted into an agricultural colony and her wealth drained, since India was forced to export raw materials and food grains and import manufactured British goods.

The Nationalists also pointed out the implications of the drain of wealth for India. Firstly, and most obviously, a part of the national product was being exported to Britain without adequate return and this unilateral transfer took the form of an excess of exports over imports. Also, since net earnings from exports were all retained abroad to meet the Home Charges and other expenses, the drain had led to impoverishment of the country. Further, the drain clearly reduced the national product that could have circulated as distribution and expenditure within the country, and this meant a significant loss of employment and secondary income generation. The drain led to a loss of wealth but more significantly, it implied a loss of productive capital, since a significant portion of the wealth raised within India was never brought back to the country. In this way, it hindered accumulation of capital within India and delayed industrial development. Moreover, in large-scale industry, the colonial rulers used unfair policies to hamper India’s development. Thus India became a net importer of capital. The Nationalists further argued though India was a significant recipient of British capital, this was used unproductively. The British brought back the capital they had drained from India and use it to secure a monopoly of all important trade and industrial production. This did not represent an investment of capital, since it was basically a reinvestment of the profits made from India between 18601-1914 (but at high rates of interest) and the eventual profits were drawn by the British investor and not by India. Thus there was “wasteful drain” of the resources that could have instead been used to create productive assets in India.

Marxist historians have put forward their own frameworks in which to study this drain of wealth. Karl Marx had argued that Indian economy consisted essentially of self-sustaining village republics. British rule represented a threat to this socio-economic order through commercialization of agriculture and a huge inflow of mass-produced Lancashire cotton goods into the Indian market. It led to the destruction of the old social arrangements without any process of constructive change. This is closely related to the ‘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. Paul Baran in his ‘Political Economy of Growth’ (1957) revived the notion that British rule broke up self-sufficient agricultural communities and changed the pattern of production in favour of export crops. This shift suited the needs of the British economy but, at the same time, distorted the internal economy of India. Further, he argued that the transfer of surplus from India to Britain was much higher than what was estimated by the Nationalists. There was a revenue transfer of funds since trade profits, remittances, earnings and salaries accrued to metropolises. He suggested that about 10% of India’s Gross National Product was transferred to Britain every year in the early 20th century.

Irfan Habib asserted that in the late 18th century, one-third of Britain’s Net National Capital Formation was made up of India’s export surplus. The rate of growth and capital formation in Britain were very slow, as were the technological rate of industry and the annual rate of savings and investment. Therefore the flow of resources from India played a major role in the Industrial Revolution in Britain. However, the extent of the drain and its significance for Britain has been questioned. The Nationalists have argued that the drain was substantial and suggested that Britain got approximately a quarter of its capital accumulation necessary for the Industrial Revolution through the transfer of resources from India and West Asia. But in the light of recent works on the Industrial Revolution such as Pomeranz or E.A. Wrigley, who have questioned the importance of capital accumulation in leading to the Revolution, this Nationalist assumption can be contested. Chris Bayly argues that between 5-15% of Britain’s resources came through exploitation of the non-European world in the late 18th and early 19th century. 

The notion of colonial South Asia as a typical dependent, underdeveloped and chronically backward region has been refined further in the works of Amiya Bagchi and Hamza Alavi. Bagchi and Alavi concede that British rule did bring about a process of economic change that had some dynamic features. It is suggested that colonial rule directed domestic economic activity towards two main areas – export-oriented agriculture to provide primary products to the West; and limited industrialization dependent on foreign firms and technology. The laws and institutions and social structures of contemporary South Asia were a creation of Britain’s requirements for cheap labour and cheap exports within the Imperial system.

Colonial scholars Theodore Morison and Vera Anstey supported the British rule by arguing that most of India’s payments to Britain were made in return for services or capital which had actually increased the wealth of the local economy. The ‘tribute’ was thus a small proportion of the overall benefits of colonial rule, such as India’s railway network, irrigation system, and modern systems of law and order and education. The repatriation of profits and interest on productive loans was especially justified in the light of the peace and security provided by British rule. They also said that the size of the unrequited transfers needed to meet the ‘Home Charges’ was small, amounting to less than 2% of the total export values at the end of the 19th century. Anstey, writing in 1929, further said that had India provided for her own military and defence, then India would have had to pay more. India had got access to the best capitalist market in the world, but at “cheapest credit”, ensuring the supply of credit to India at the lowest rates possible. The tribute was thus a small price to pay for modernization. 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. 

Goldsmith too provided a defence of British Rule. He suggested that the economy was stagnant in the two centuries prior to 1860, contradicting the views of the Nationalists who had maintained that the Indian economy was flourishing until the British government took control. After 1860 too, there was not much difference in terms of growth of real national product and all estimates suggest that any increase in per capita income must have been very small. However, 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 (primarily in cotton and jute) and banks. In fact, if compared with countries such as Turkey, China, Afghanistan and Tibet, which were at a comparable stage of development in 1860, Goldsmith feels that the British cannot be accused of retarding the development of the Indian economy. He claims that the British improved law and order and financed India’s railroad system on better terms than any non-European agency could have obtained in the international capital market. They also introduced the nucleus of a modern banking sector and a currency system. The Nationalists, however, maintain that even if cost of borrowing from British sources was lower, a degree of exploitation cannot be denied since the various services served mainly British strategic needs. For instance, the large army maintained in India was to protect the British Empire and not India. Similarly, the railway system was actually designed to benefit the export trade to Britain rather than the needs of the domestic economy.

In their revisionist critique of the Nationalist position, K.N. Chaudhuri and Tomlinson, representing the Colonial view, injected a new strand into the debate when they argued that the notion of unrequited exports was unjustified. Tomlinson suggested that the Nationalists had exaggerated the amount of the tribute. He cited figures from A.K. Banerji’s ‘Aspects of Indo-British Economic Relations’ to show that once Home Charges and other invisibles are taken into account, India had a deficit in her current account balance of payments during the last 3 decades of the 19th century. In other words, the large outflow on account of invisibles converted the surplus in merchandise trade into an overall deficit in the current account. However Tomlinson ignores the fact that invisible imports and Home Charges were themselves targets of attack from the Nationalists.

Tomlinson also disputes the prevalence of mass poverty and famines as evidence of the drain. He has argued that whatever definition of the drain used, it is hard to prove that the poverty of the rural economy was the direct result of high rates of taxation to fund unilateral transfer payments abroad. Although taxation in India increased substantially in the last quarter of the 19th century, its burden did not fall primarily on agriculture. Between 1872 and 1893, the central government tax revenue rose from 374 million pounds to 501 million pounds. But over one-third of the 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- the lower relative value of the rupee meant that a larger quantity of rupee funds had to be collected since the volume of transfer to Britain was fixed in terms of pound sterling. He also suggested that it was possible that this inequality increased with bullion import.

K.N. Chaudhuri opposed the Nationalist attempt to explain poverty and stagnation in the colonial period in context of British exploitation. As opposed to the ‘wider definition’ of drain adopted by the Leftist-Nationalists, Chaudhuri gave a ‘narrower definition’, including only the trade surplus and Home Charges. Further, he saw this as a part of the overall colonial relationship and the terms of trade between a developing and a developed country. According to him, there was always exploitation in the relationship between a primary-producer country and a manufacturing one, in which the former was always at a disadvantage. He also viewed the term ‘unrequited exports’ as inappropriate since the tributes paid by India were actually Home Charges. India was paying for gold imports and invisible service charges such as freight on shipping, insurance and banking commissions etc., which he says amounted to 5% of India’s national income in this period. So it was not significant enough to explain India’s under-development.

Chaudhuri also pointed out that when a unilateral transfer of capital takes place through exports which are financed by government budgetary expenditures, the immediate effect is to bring the foreign trade multiplier into action, which restores the level of domestic income to the pre-taxation level. Therefore, even if there was a leakage of real resources from the economy, the level of money income remained the same. According to Chaudhuri, in order to measure the value of the drain, it was important to use a ‘value added’ concept. The cost of producing the exports must be subtracted from their final sales value. This difference represented the real income leakage. He 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. The highly favourable conditions which characterized Indian exports in the 2nd half of the 19th century could have been turned to India’s advantage if there had been systematic plans for economic modernization. But this opportunity was lost because Indian foreign trade was a dependent factor in an Imperialist system, which didn’t give primary importance to transformation of the domestic economy.

The Nationalists had alleged that British rule expropriated all resources above subsistence, leaving no surplus for any growth. G.V. Joshi argued that the insufficiency of working capital available in India was due to absence of any large capital accumulation, which in turn was partially the result of the drain of capital from India to Britain. Dadabhai Naoroji also asserted that the drain facilitated the penetration and exploitation of India by foreign capital. Some modern historians working within the Nationalist tradition argued that capital did increase in India but that it accumulated in the hands of ‘parasitic’ groups of landlords, usurers and native aristocrats who preferred to hoard the specie rather than channel it into productive investments. However Colonial writers point out that the Nationalists tended to ignore the internal drain caused by conspicuous consumption of these ‘parasitic’ classes. Also they did not take into account the problems pertaining to technique, entrepreneurial skill or technology, necessary to transform an economic surplus into industrial capital. Further, although there was some growth, it developed at a rather slow pace owing to domestic factors, namely cultural, religious and social barriers. Tomlinson asserted that the inflow of bullion meant that some Indians were increasing their assets during the colonial period.

In recent times, revisionist scholars have added to two broad positions regarding the drain of wealth. An important revision of the Nationalist theory came with the work of Sunanda Sen, who studied the period between 1890 and 1914. While agreeing that there was a drain of wealth from India to Britain, she faulted the early nationalists on two main grounds. Firstly, she argued that it was illogical to argue that India’s export surpluses remained unpaid. Revenue against such surpluses was duly remitted under the Council Bill schema and was actually paid out via the intermediation of exchange banks to exporters in India. Secondly, she opined 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 century. This was a substantial sum if we see it in the context of the national income of India, which was around 120 million pounds in 1900. The Home Charges of the Indian government were disbursed in London in sterling procured from the exchange earnings, while the unspent part was maintained as a steady and growing sterling balance by the Bank of England.

A formal device employed by the British rulers to siphon off the sterling proceeds of India’s export surpluses to England was the Council Bills drawn on the treasury of India and sold by the India Office in London to exchange banks which wanted to remit the proceeds of India’s net export earnings. This new system of remittances reduced the importance of the flow of treasures (which were important means of settling balance of payments) and provided a route for retaining in England the entire amount of India’s export surplus. Sunanda Sen has estimated remittance flows through sales of Council Bills and according to her, the ratio between the Home Charges of expenditure on civil, defence and productive aspects in 1910 stood at 1:1:3, indicating the crucial importance of productive expenditure in determining the magnitude of Home Charges, most of which were incurred on servicing, irrigation and railways loans.

Sen also noted that there was a practice of maintaining a distinction, in contemporary official reports, between ‘productive’ and ‘unproductive’ categories of official loans in India. The former referred to the money spent on public works like railways and irrigation, while the latter represented borrowing for purposes like famine relief, military operations and civil administration. A device of accounting transfers hidden in the budgetary practices of the Indian government was the camouflage of borrowing under productive heads, which was then used to cancel old productive debt, while public works expenditure was in reality financed by a revenue surplus. Hence there was a natural tendency on the part of the government to continue with its growing level of unproductive expenditure.

Sen also quotes the work of ‘colonial apologists’ like Theodore Morison, who made a distinction between debts under ‘economic’ and ‘political’ heads. According to Morison, the 7 million that India paid as a ‘political drain’ was in return for the “freedom from external aggression and peace and order within the borders”. However it is clear that the justifiability of imposing these Home Charges on India were questioned even by the British. According to Sen, most of India’s expenditure abroad was political in origin and was avoidable in the absence of colonial rule. Sen calculated that in the year 1910-11, out of a total expenditure of 18.6 million on Home Charges, more than 60% was spent on servicing loans incurred for productive purposes, i.e., for the construction of irrigation canals and railways. However she does point out that railway construction was undertaken in the interests of the British economy.

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 rupees in India required the transformation of this part into forms useful to the metropolis – 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. In this way, a portion of total taxation took the form of exportables without payment.

According to her, after the 1820s, the opening up of India to free trade in British textiles and the emergence of net imports on this account led to the drive to expand exportables in the primary sector (drugs, industrial raw materials etc.). This rested on a combination of physical coercion by the colonial state and economic duress faced by the cultivators because of the necessity of paying revenue and rents. In this way, the unilateral transfers from the colony to the metropolis led to the commodization of production. She calculated that between one-sixth and three-tenths of the total taxation revenues of British India were transferred abroad every year over a period of 175 years, beginning in 1765. In this way, the colonial state acquired a surplus budget with a substantial part of revenues being earmarked for expenditures abroad, and not for development within the country.

Also, according to Patnaik, the inflow of wealth from India contributed greatly to the Gross Domestic Capital Formation in Britain. In the age of imperialism and capital exports from the 1870s onwards, India’s enormous and increasing foreign exchange earnings financed a substantial part of the deficit in Britain’s balance of payments. 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”. In a later work, she studied re-export statistics to come to the conclusion that there was a great withdrawal of resources from India which were then unilaterally transferred to Britain.

Tirthankar Roy has provided a critique of the Leftist-Nationalist argument on several grounds. Firstly, he points out that the inference that commercialization could have been a more powerful stimulus for growth if colonization had not intervened is difficult to accept. It is a speculative question and there is no quantitative data to measure the extent of commercialization in the 18th century India. Further, the notion that commercialization was forced upon the peasants by taxes or debts, and not driven by profit motive, is seriously disputable. Statistical data on agriculture shows a strong association between rates of profit, growth in productivity and commercialization across crops and across regions. 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. Three key factors encouraged economic growth in 19th century – growth of world trade, a strong state and a modern transport and communication system. 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.

There is very little doubt that the British gained a lot, both economically as well as politically, from their occupation of India. However this is only tangentially related to the drain of wealth hypothesis. An important question that needs to be analyzed is whether the Indian economy would have developed better if British rule had not been established in India. In conclusion, we may say that 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, i.e., being ruled by a foreign power. As T. Roy says, the drain of wealth argument was a ‘political tool’ for early Nationalists, which were later reestablished by Leftist-Nationalist historians as correct and valid descriptions. 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.

BIBLIOGRAPHY

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  8. Class Notes