Economic Drain in India: Concepts, Components, Extent and Its Theory | Indian Economic History

Read this article to learn about Economic Drain in India:- 1. Introduction to Economic Drain 2. Concept of Economic Drain 3. Components 4. Extent 5. Drain Theory and Critics.

Introduction to Economic Drain:  

Many distinguished leaders of thought observed strains and stresses faced by the Indian people after the Mutiny of 1857.

In explaining the dynamics of a colonial, poor and dependent economy, they observed that economic surplus was extracted by the foreign government by a complicated mechanism of “economic drain”.

The transfer of resources and wealth from India to England without providing ‘any equivalent return’ which began in the second half of the eighteenth century had been christened by Indian ‘non-practicing’ economists like Dadabhai Naoroji, M. G. Ranade, R. C. Dutt as the “economic drain”. The drain theory—which Indian thinkers made their own—was as old as Rammohun Roy, through Naoroji and others it came to Gandhi. Not only Indians but also some notable foreign stalwarts also observed this phenomenon.

The most sophisticated account of the economic drain—a basic characteristic of the Indian colonial economy—was made by Dadabhai Naoroji in 1871 in his book, Poverty and un-British Rule in India. The basic purpose of his study was to measure mass poverty which was a direct consequence of the economic drain.

However, the idea of “drain theory” should not be attributed to Dababhai Naoroji. It was popularized by him as an explanation of the economic predicament of a colonial economy. He articulated it into a framework in which many of the hard-pressed economic problems of the country could be seen in their proper interrelations. According to him, the drain was the basic cause of India’s, poverty and the fundamental end of the British rule. In fact, modern colonialism was inseparable from the drain. It could be viewed as “evil of all evils.”

The Concept of Economic Drain:

The concept of drain is a post-Plassey affair. Dababhai used phrases like “bleeding drain,” “a running sore”, “material and moral drain,” and “deprivation of resources”. All these phrases can be summed up as “economic drain.” However, Dadabhai did not claim any originality as far as the genesis of the concept of drain was concerned. He borrowed the concept from the writings of the British authors.

To the British writers like Sir John Shore (in 1787), Mr. Frederik John Shore (in 1837), Mr. Sanile Marriot (in 1837), etc., the concept of economic drain involved:

(i) Trade without equivalent returns,

(ii) Drain of wealth, and

(iii) Annual tribute.

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”.

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.

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.

Components of Economic Drain:

After the battle of Plassey, the balance of power shifted to England. Down to 1757, as the Indian cotton and silk goods found a big outlet in the West, the European traders brought bullion into India even in the midst of criticism at home. Such criticism was made because India did not have equivalent goods to offer to the European traders. But loosing bullion to India was hardly tolerable.

This problem was solved dramatically after the transfer of power in 1757. Now, India went on pouring her accumulated capital in Britain by way of plunder from Bengal, tributes, profits from internal trade and the surplus from Dewani revenue of Bengal. Ironically, the last-named item was christened by the Company as ‘investments’ in India.

After the grant of Dewani of Bengal, the Company amassed enough revenue which was used to buy goods for export. In 1767, the East India Company’s investment stood at Rs. 6 million. In 1793, it went up to Rs. 10.96 million. Another Rs. 6 million per year was exported by other non-British companies, who, however, were thrown out of the market by the English companies by 1780.

Thus, “profit-making through trade became integrated with administration which also became an instrument of profit-making.” Thus, the drain meant the transfer of goods or wealth from India to Britain without any equivalent return, a simple matter of unrequited export of goods and not an export of bullion.

Since the unilateral transfer of funds to Britain was of dire necessity, the problem of drainage of wealth became complex after 1833 when the EIC was stripped off its commercial functions. The British Government now went on innovating newer and newer techniques of drain for empire-building in and outside India. It now consisted of mainly “Home Charges” and “unrequited exports”.

(i) Home Charges:

The Home charges were born sin, as remarked by Amalesh Tripathy. The economic drain is illustrated with reference to what was called ‘Home Charges’ which referred to the expenditure incurred in England by the Secretary of State on behalf of India.

The Home Charges were annually remitted to England “to pay interest on money expended in India on railways and irrigation works and for other purposes of the Government, to pay for stores, charges for effective and non-effective services of British troops on the Indian establishment, furlough and retired pay of Civil and Military -Officers and servants of the Government and other expenditures.”

India was forced to make payments on account of railways and irrigation works. For instance, the guaranteed interest on capital ranging from 4.5 to 5 p.c. paid out of Indian revenues for railway contraction in India to the private railway companies. This guaranteed scheme; turned out to be wasteful because more capital was invested by the railway companies than was economically justified.

By assuming a minimum guarantee on invested capital, the government assumed the risk without the chance of making profit. It led to over­-capitalization also. The capital used in excess of the requirements and the guarantee of interest on the capital which the companies invested constituted “drain”.

Another component of Home Charges consisted of purchases made abroad for government stores in India. In those days, the government was the biggest purchaser of iron and steel and engineering goods and a variety of goods as India was unable to supply these.

The objective was the encouragement of indigenous industries. Thus the stores purchase policy assumed critical importance in accelerating India’s industrial development. However, the scheme would have been beneficial had the government purchased their stores in India instead of in England. From 1858 to 1875 stores were imported through the Stores Department of the India Office in England. The Home Charges also included furlough (leave of absence) allowances, salaries, pensions to British Indian officials and army officers. It also included defence expenditure incurred by the Government of India.

Almost all high-paid posts were ‘reserved’, for Europeans. Recently, it has come to light that massive government expenditure in India was incurred on ‘European engineer(s) and university Professor(s)’. Ironically, British Government’s own expenditures both on higher education and on public works were rather insignificant. In India, practically, in other spheres of jobs, the same policy remained and the differences between Indians and Europeans in pay and wages widened with time. One author remarked that such policy of wage structure came to be determined ‘by racial discrimination rather than labour market necessities’.

Along with the defence expenditure, civil expenditure also shot up to an abnormally high level. The remittance of private fortunes like savings as well as salaries and pensions of European employees were the most objectionable forms of drain.

The policy of excluding Indians from the higher ranks of the civil services (e.g., holding of examinations in London, lowering of the maximum age limit from 23 to 19 gradually since English candidates become graduates earlier than their Indian counterparts) and the policy of military expenditure (e.g., the recruitment of one British to every three Indian soldiers) resulted in an excessive sterling cost of Indian administration.

The colonial administration, in the language of Dadabhai, created “two India’s”. One was the prosperous India. Thus, British India exhibited what is now called a “dual economy” in the colonial setting.

Another mechanism of funnelling wealth to England was the huge amount of interest on public debt incurred by the Government of India. Before the Mutiny, the public debt was on account of cost of wars waged by England in and outside India and Home Charges, i.e., tribute. In 1858, the debt stood at 70 million pounds. It rose to 81 million pounds in 1859 and 98 million pounds in 1860. By 1900, the figure shot up to 200 million pounds and then to 274 million pounds in 1913.

This rapid increase in debt and especially in sterling debt which involved an equally large volume of interest liability as was regarded a drain of India’s resources—a scandalous waste of Indian money. And to raise newer and newer loans, the British Government devised newer taxes in this over-taxed country. Thus, a vicious circle was set up between two interdependent variables — increase in taxation to extract as much as possible internal resources, and the mounting sterling indebtedness.

Further, public debt was incurred to conduct not only internal wars in India, suppression of the 1857 Mutiny but also most disgracefully to conduct foreign wars and military expeditions (e.g., Afghanistan, Persi, Tibet, etc.) countries. There cannot be any qualms that such foreign expeditions were meant to fulfil only the ‘imperial interest’ of Britain and thus were uncalled for. Even Lord Eurzon wrote in 1901 that India “has been so flagrantly flecced in the past.”

Imperial apologists like Vera Anstey argued, however, that had there been no Home Charges India would have to provide for her own normal and military defence at her own cost and, in the process, India would definitely stand as loser— “it is surely obvious that the “saving” effected would be a negative quantity.” Nationalists strongly objected to this hypothesis.

(ii) Unrequited exports:

The crux of the drain theory was, of course, the concept of “unrequited exports” which produced no equivalent returns. According to Dadabhai, the external economic drain was a drain because of unrequited exports. India’s export surplus, that is, the excess of exports over imports, was virtually ‘unrequited’. It grew continuously in size since 1850.

Excepting 1859-60 when there had been import surplus of Rs. 11.75 crore, the quantum of export surpluses of ‘unrequited’ variety between 1849-50 and 1909-10 were mind-boggling — it constituted ‘practically a half of the savings that a subsistence economy like India could be expected to generate at the time’. To put Great Britain’s balance of payments in order, maintenance of an export surplus was vital.

As other European countries went on industrialising, Britain was put in a comparatively disadvantageous position. To counteract this situation, Britain needed India. Further, India’s continuous export surplus with countries other than Britain counterbalanced British deficits. As a result, India’s meagre stock of capital was drained away in the form of “unrequited exports”. Indeed, the export surplus reduced the country’s power to save and invest, and, therefore, inhibited the country’s economic progress.

Truly speaking, it is difficult to make a comprehensive list of the items that constituted drain. In view of this, the Amrita Bazar Patrika, on 14 April 1881, observed: “India is sucked in so many different ways and by so many parties that they are themselves ignorant of one another’s whereabouts and doings and of the extreme peril to which their patient is subjected by their operation.”

Extent of Economic Drain:

Such “Indian Plunder” or the so-called “drain” cannot be accurately estimated because of the fragmentary nature of data. Thus the subjectivity, rather than objectivity, of the authors determined the extent of drain. During the period under study, attention has been naturally focused on Bengal as one can study the process of drain in its very classical form.

After the battle of Plassey, Bengal in the 1760s provided Rs. 24 lakh a year for the Company’s China trade. In the 1770s it marginally fell to Rs. 20 lakh a year. By the end of the 18th century, total value of coins, bullion and merchandise drained out from Bengal per year amounted to sicca Rs. 98,42,359.

According to William Digby, probably between 1757 and 1815 (that is, between Plassey and Waterloo) “a sum of 1000 million pounds sterling was transferred from India to English Banks”. This gives an average of 17.2 million pounds per annum. On the contrary, Prof. Further showed an ‘underestimate’ of drain of not more than 1.9 million pounds annually during 1783-93.

Rammohun Roy estimated it at 110 million pounds in the form of “tribute” between 1765 and 1820. Dadabhai quantified economic drain as 15,000 million pounds for the period 1787-88 to 1828-29. According to R. C. Dutt, on average, ‘one-fourth of all revenues derived in India was annually remitted to England’.

He further estimated that during the last decade of Queen Victoria’s reign (1890s), a sum of 159 million pounds out of a total revenue of 647 million pounds was remitted from this country to England. His another estimate showed that annual payment under the “Home Charges” increased from 5 million to 15 million pounds between 1856 and 1876 and it rose to more than 17 million pounds by 1901-02.

According to R. C. Dutt, Home Charges in 1901-02 can be divided into the following heads:

Besides this money burden, the economic drain involved real burden arising out of growing tax burden. According to Dadabhai, the average tax burden in the poverty-stricken country was estimated to be 14.3 p.c. of income in 1886, as against 6.92 p.c. income of England.

Estimates of modern historians are, however, rather underestimates. They estimate drain as a proportion of national income rather than public revenue. T. Mukherjee argues that between 1870 and 1900 the drain varied between a meagre amount of 0.4 percent and 0.7 p.c. of India’s national income. It seems that the drain theory was thus an inconsequential.

This underestimation is hardly accepted because first drain has to be linked with the public revenue rather than national income. Secondly, even if it was relatively small, it continued for a period of not less than 50 years. It is to be pointed out here that “drain”, according to Naoroji and Dutt, “was not an erratic or occasional shock, but a constant leak”. Thus, there is no logic of debunking this drain theory as envisaged by the foreign authors of it since it was an ‘unceasing flow’.

According to Sir Theodore Morrison, exaggeration was due to the fact that the drain theorists did not allow for relevant deductions (like balancing export surplus by invisible imports of shipping services, insurance charges, and expenditures by Indian researchers and travellers abroad) while calculating export surplus.

In addition, if imports of gold and silver were taken into account the extent of drain would have been small. However, G. K. Gokhale, G. V. Joshi etc., criticised Morrison’s selective and one-sided view. The extent of drain has been estimated by them after allowing deductions.

The huge drain of wealth from India contributed greatly to the industrialisation effort of England, England’s fortune of having a modern industrial structure was largely built upon the ruins of Indian industries. The necessary stimulus to industrial production in respective stages of development depends largely on the availability of finance. It was the Indian loot—the drain of wealth from India by the EIC—that helped financing British industries in its initial stages of industrialisation.

Economic Drain Theory and Critics:

To the critics of the economic drain theory, the extent of drain was exaggerated by nationalists since foreign trade and export surplus constituted an unimportant part of India’s national income. With the enunciation of the drain theory, controversy raged on the question as to whether all payments constituted ‘drain’.

For instance, dividend and compensation paid to the stockholders and shareholders of the EIC at the time of transfer of power in 1833 was a “tribute” and a “drain” on Indian resources. But, interest payments on loans for railways and irrigation works and the payment for stores cannot be described as “tribute” or “drain”.

Critics argue that these payments represented the type of foreign expenditure which Japan, an independent country, had to incur in the initial stage of her industrial development. “In so far as there were goods received or fixed asset created out of loans, to be shown against payments made, these could not simply be described as a drain.”

According to Morrison, British capital used to construct railways, irrigation, tea plantations, and jute mills was definitely productive in the sense that this foreign capital raised national income and made long run economic growth possible.

“Rather than complain about a drain, Indians should be grateful to British investors for making good the deficiency in India’s domestic capital resources. The benefit to India was all the greater because the British connection enabled it to borrow from the world’s cheapest capital market. Borrowing in India, even if it were feasible, would have been far more expensive.”

Also, the Britishers argued that ‘England receives nothing from India except in return for English services rendered or English capital expended’. Regarding good government, law and order, less said the better. However, one can defend remittances of profits on British capital invested in railways, irrigation, plantations, and others on the ground that such things were, after all, ‘developing’ or ‘modernising’ India.

Rightly, nationalists were critical of the public debt policy of the Government of India as it reflected the colonial status of the country. Bulk of India’s public debt was ‘political’ in nature, as well as unproductive (e.g., India’s war gifts to England, pension and furlough payments and the expenses of the India Office), useless and inessential. But it is to be remembered that India had been saddled with a crushing national debt.

Amalesh Tripathy articulates: “The very meagre of national income of India could not afford to bear the huge expenses of a top-heavy European bureaucracy whose savings added to the capital-stock of Britain and the slightest fall of whose incomes form un-favourable movement of the exchange rate was met from on over-burdened Indian exchequer.”

The upshot of the above discussion is that the British Government length­ened its arm of injustice to the people of India for empire-building in and outside India. The “drain theory” as enunciated by the nationalists clearly exposed the character of the British rule. The exploitative role of the British Government dates back to the Battle of Plassey.

India had been reduced to a most profitable ‘colony’ in the world. Britishers found colonies as ‘the source of legitimate gain for the ruling country’. The ‘tribute’ or ‘annual drain of wealth from India (Naoroji, D.) in the period of ‘merchant capital’ (1757-1813) played the most key role in financing Britain’s capitalist development. Economic ‘drain’ is the most fitting term for this phase of colonial exploitation.