Priyanka Kumar

B.A. History (Hons.), IIIrd Year

Q. 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 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 18 th 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

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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.

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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.