British Era: Was ‘Drain Of Wealth’ Responsible For India’s Poor Economic Status?

From the term ‘drain of wealth,’ one can understand the constant outflow of wealth and resources from India to England, for which there was no adequate equivalent in economic or commercial returns. It is believed that the process started in 1757 after the Battle of Plassey, the result of which was the defeat of the army of Siraj-ud-Daulah and the subsequent beginning of unconstrained British rule in India.

Many Indian and foreign economists and thinkers, such as Dababhai Naoroji or R.C. Dutt argued that after the East India Company acquired power the drastic measures were put in place, the aim of which was to exploit Indian agricultural, industrial and commercial revenues for Britain’s own needs rather than to invest in the development of India. As John Sullivan, the Member of the Government of Madras and President of the Board of Revenue put it himself: “Our [British] system acts very much like a sponge, drawing up all the good things from the banks of the Ganges, and squeezing them down on the banks of the Thames.”

On the other hand, critics of the drain theory claim that the magnitude of the damage done by the British policies is exaggerated. They argue that the drain theorists did not take into account the invisible gains from mutual trade, as well as considerably low interests on foreign capital.

Indian economy during British rule.

Taking into account these two opposing views on the drain of wealth, this is an attempt to answer the following question: To what extent was the drain of wealth during the colonial period responsible for the poor economic status of India?

In an attempt to find an answer to this question, arguments are being discussed and put forward by both sides: proponents of the drain of wealth theory as well as its critiques, and subsequently draw a conclusion based on the analyses of these arguments. In the closing part, I will provide an answer to the above-mentioned question derived from my analyses.

As already mentioned previously, the drain of wealth proponents explain that the economic drain in India was a result of a built-in mechanism put in place by Britain, the aim of which was unilateral exploitation of funds from India through external trade. This was done in numerous ways, such as home charges, returns on account of irrigation and railway systems, Indian exorbitant office expenses, remittances to families in England, payments for British goods imports, interest rates on public debt held in Britain, and undervaluation of trade and Indian labour.

However, to exploit India externally, the internal drain had to be put in place first. Under the term internal drain, Naoroji understands the relocation of resources within India: from poor regions to the rich ones, from impoverished people to those on the other side of the spectrum, and from rural areas to the city. Consequently, due to high taxation, interest rates, and exploitation of profits the external drain of wealth as possible; Naoroji thus explains the economic drain as an external-cum-internal process, in which one was dependent upon the other. As Naoroji observes, “in short, it is the pitiless perversion of economic laws by the sad bleeding to which India is subjected, that is destroying India.”

The drain generated a recurring surplus for Britain, which in turn was used in the form of investment in India; however, such investment did not produce any revenues for India. It did quite the contrary. One of the elements of this investment was home charges.

The home charges were annual remittances from India to Britain to repay the expenditures incurred by the Secretary of State on behalf of India. Home charges comprised numerous payments, such as interest rates on public debt and investments made on large construction projects like railway or irrigation; dividends for the East India Company stockholders; expenses stemming from India’s inferiority to foreign rule such as civil and military charges; and government store purchases manufactured in Britain for the Military, Marine, and Civil department operating in India.

The interest rates charged were exorbitant and India did not derive appropriate benefit from such borrowed capital. The reason for this is put forward by B.N. Ganguli explains that under normal circumstances the income generated from projects such railway should remain in the country, however, this was not the case in India as huge portions of the income was taken away by British directors, superintendents, and European employees rather than disbursed among Indians.

Moreover, huge capital export surpassed the inflow of foreign capital and thus it formed a situation of a vicious circle: a shortage of capital could not be used productively to generate employment and income in India on the level of a healthy economy. Naoroji tries to explain such a situation by comparing the inflow-outflow of capital in India between 1858–69 with Australia and Canada, in which there was an excess of capital inflow which generated enough capital to be invested in their economic development. However, the situation in India was contrary.

Total exports (including treasure) in India during the same period reached £456 million, while imports (including treasure) accounted for only £419 million, thus there was a shortage of approximately £37 million. Such considerable outflow of capital caused an unhealthy state of Indian economy, prevented it from home investments into economic development, and made it dependent upon borrowed British capital and investment.

As Naoroji explains, “Britain India’s wealth is carried out of it, and then that wealth is brought back to it in the shape of loans, and for these loans, she must find so much more for interest; the whole thing moving in a most vicious and provoking circle.” However, in addition to the home charges, Indian’s drain of wealth has been increased by another burden on its economy: interest on foreign capital investments.

Foreign capital investment from a private Britain‟s finance capital to India has been put under considerable interest rates, which resulted in another profound leakage of wealth from India. One such example was the construction of the railway system in India. According to Morrison, one of the critiques of the drain theory, the foreign capital investment in railway development certainly helped to increase the productivity of India through providing means of transport of goods, as well as allowed India to borrow money for the project from one of the cheapest capital markets in the world.

Needless to say, this is true and Naoroji himself acknowledges it, it is important to state that India did not derive the benefit of income generated by the railway system; the income generated has not been dispersed among Indians but rather Britons. Thus, for Naoroji, the problem lies not in where the capital is coming from, but rather how to allow Indian people to enjoy the benefit of such capital investments in India.

Therefore, despite projects such as railway construction helped to improve the economic situation in India from the long-run perspective, it certainly did not generate capital available to be used by India, but rather to be diverted to Britain. Additionally, the foreign capital for the construction has been put under a huge burden of interest rates which caught India in an already mentioned vicious circle. Such practices brought forward another form of drain wealth, this time in the form of bullion.

The import of bullion has been particularly aimed at commercial and financial gains by Britain, rather than to increase Indian industrial economic development in which foreign capitalists had no true interest. Naoroji finds out that ‘‘during the period 1801–63 the net imports of bullion were £234,353,686. From 1864 to 1869 the net imports of bullion were £101,123,448.’’

Representational image.

The Question Is: What Were Such Huge Amounts Of Bullion Used For If Not To Increase Indian Economy?

The explanation lies in the increased monetization of the Indian economy to repay its loans and foreign borrowings, which called for a profound increase of silver coins available. Thus imports of silver were not aimed at investments in the economy, but rather as a means to extract even more wealth from India in the form of cash revenues and remittances. The aim was clear: “India must be bled”, as Lord Salisbury, the Secretary of State for India acknowledged it himself.

Naoroji agrees with Lord Salisbury and continues to explain the phenomenon: “When we talk of all the silver having purchasing power, we forget how minutely and widely a large portion of it must be distributed to be of no use for national purposes.” Such an explanation supports the drain of wealth theory through the exploitation of interest on foreign capital investment and bullion imported, mainly for Britain’s benefit.

Nevertheless, according to Morrison, in calculating the export surplus there is a need to account for so-called invisible gains for India: shipping services, insurance, and/or money spent by Indians abroad. However, in this case, Morrison and other critiques of the theory seem to ignore huge payments India had to make to insurance and shipping companies for their services. Thus, rather than to see it as so-called invisible gains for India, insurance and shipping services constituted another channel for considerable capital outflow from India to Britain.

Despite all the shortcomings of various criticisms of the drain of wealth theory, it is important to acknowledge one crucial finding put forward by these critiques: through a mutual economic relationship with Britain, India derived crucial benefits of good governance, peace, order, modern and highly efficient administration, and protection from foreign aggression. According to numerous critiques, this would be not possible without the direct involvement of Britain in India, and thus such invisible gains highly balance losses India encountered due to Britain’s exploitation.

Needless to say, this is true, it does not diminish the extent of such asymmetric power and political relations between India and Britain had on the economic backwardness and stagnation of India. If the Indian economy had been healthy and free to prosper, India would be able to obtain the above-mentioned benefits of good governance and peace itself, albeit for a bigger price. Nevertheless, such investment would certainly represent numerous times lower outflow of capital abroad than the drain of wealth did.

To support this argument, Asim K. Karmakar explains that such influence Britain had over India was “far from serving as an engine of economic expansion, of technological progress, and social change, the capitalist order in these countries has represented a framework for economic stagnation, for archaic technology, and social backwardness.” In light of Karmakar’s argument, the above-mentioned critique seems irrelevant.

Photo: DNA India

Conclusion

In conclusion, I would like to bring forward the question raised in the opening paragraph: To what extent was the drain of wealth during the colonial period responsible for the poor economic status of India? After identifying and examining the main channels of economic drain of wealth by Britain in India, such as various and numerous forms of home charges, interests on foreign capital investments, and foreign banking tools which also stunted the potential growth of Indian companies, it becomes clear that the drain of wealth had a profound impact on the Indian economy.

Not only it exploited and diverted enormous amounts of capital and wealth from India to Britain, but it also made India dependent on Britain’s foreign investment, borrowings, and services, the result of which was an even bigger outflow of capital in form of remittances and interests, as well as the destruction of the domestic companies and their competitiveness. Thus, India found itself amid the capital- outflow vicious circle, from which there wasno escape.

To put it in the words of R. C. Dutt, “taxation raised by a king, says the Indian poet, is like the moisture of the earth sucked up by the sun, to be returned to the earth as fertilizing rain; but the moisture raised from the Indian soil now descends as fertilizing rain largely on other lands, not on India.” The drain of wealth severely crippled economic prospects and development in India for numerous decades. Sadly to say, this conclusion of India’s economic stagnation was true not only during the period of colonial rule but has been affecting India’s socio-economic development even for years after that.