Drain of Wealth Theory

What Is Drain of Wealth Theory?

It refers to the economic critique of colonial rule in India that was advocated by the early nationalists. They described the constant one way flow of wealth from India to England for which India received no returns as 'Drain of Wealth'. This occurs when gold and silver flow out of a country as a result of an adverse trade balance

Origins of Drain of Wealth

In the 17th and early 18th centuries, the English East India Company used to import bullion - gold and silver to the tune of 20 million, and funds from England for purchasing goods in India. These goods were then exported to Europe for sale. After the Battles of Plassey (1757) and Buxar (1764), the Treaty of Allahabad (1765) was signed, which entitled the Company to collect land revenue from the province of Bengal, the Company began generating surplus revenues (after paying the duties and tribute to the Nawab of Bengal).The Company used these revenues to purchase goods in India which were then exported for sale in Europe and elsewhere. It eventually eliminated the need for the Company to import bullion and funds from England to finance its operations in India. It resulted in a situation where Indian revenues were used to purchase Indian goods which were then exported out of India, without India getting anything in return. This was the beginning of drain of India's wealth.

Drain of Wealth was Facilitated by the Position Enjoyed by East India Company

The Company initially had a dual role. On one hand, it functioned as a government entity which had the power to levy and collect taxes such as land revenue.On the other hand, it also functioned as a commercial entity and invested the revenues collected in India to expand its business. The revenues going to the Company had been termed by historians as a political tribute. This was because the political power enjoyed by the Company was the reason for its ability to generate revenues out of Indian territories and it was a tribute in the sense that India did not get anything in return for paying such revenues. It was essentially a political trade and thus not a normal trade. It generated a revenue surplus through -

a. Oppressive land revenue policies

b. Monopolistic control over Indian markets

c. Exactions made by company officials

The company used this revenue surplus as investment and made purchases with it. This system, however was brought to an end by the Charter Act of 1813.

Constituents of Drain of Wealth

Territorial Expansion

The Company used the revenues for extending its territories in India i.e., they were used to finance the Company's military campaigns against native rulers. Territorial expansion enabled the Company to in turn generate greater commercial revenues in the form access to Indian goods for exports. Thus, under the Company's rule, India was caught in a never-ending, self-contained system of drain of wealth.

Movement of Private Wealth

Apart from the Company's revenues, the drain also included the movement of private funds to England. This had happened primarily by the means of bills of exchange. Under this facility, bills of exchange can be purchased in India using money raised in India. These bills can be exchanged in England for local currency. Some of the private funds that were accumulated also included the earnings of Englishmen from plunders during wars, bribes obtained from the native states, and the wealth accumulated from fraudulent business deals with Indian merchants. According to an estimate by G.A. Princep, a reputed English businessman, over Rs. 1 crore was sent away from India every year between 1813 and 1820 as private wealth.

Payments to Foreign Banking and Insurance Companies

Another form of movement of wealth away from India was the financial capital. It included the monies paid to banks, insurance companies, shipping companies etc., in England for the services they render in India. One estimate puts this amount at Rs. 57 lakh per annum between 1813 and 1820.

Remittances by the Company - Home Charges

The Company's remittances to England also formed a major part of the drain. This included,

  • Salaries and pensions paid to the Company's employees in England.
  • Interest amount on loans raised by the Company in England.
  • Dividends paid to the Company's stockholders.

Such remittances by the Company later came to be known as the 'Home Charges' when the British Parliament took over administrative control of India. Home charges also included,

  • Salaries and pensions paid to the British civilian and military personnel posted in India which were remitted by them to England.
  • Store purchases made in England by the Secretary of State on behalf of Government of India for the civilian and military departmental needs.

Though the amount remitted varied every year, it was estimated to be in the range of one to three crore rupees per annum.

Reasons for the Drain of Wealth

One of the earliest propagators of the drain of wealth theory was Dadabhai Naoroji. In 1867, he put forward the idea that the colonial rule was draining and bleeding India of its wealth. He wrote (in his work "Poverty and Un-British Rule in India", 1880) that it was the pitiless action of British policy which was eating India off its substance. He lamented that the perversion of economic laws in India by the British rule is draining India of its prosperity and is destroying the nation. He identified the following reasons for this drain:

  • All the civilian and military expenses of Britain were paid by India.
  • Indian revenues paid for the territorial expansion of the British Empire, within and outside India.
  • Annuities that were paid on railway and irrigation works in India which were financed by costly British capital.
  • The skewed nature of free trade imposed on India - with restricted exports and free imports.

Another well-known argument supporting the drain of wealth was given by R.C. Dutt. In his work, "Economic History of India", Dutt had equated the drain of wealth to moisture being sucked out of Indian soil to fertilize the lands in England. He commented that the economic drain out of India was so severe that it had impoverished one of the most prosperous countries on earth. He lamented that India was reduced to a land of famines which were frequent, widespread and fatal as a result of this drain.

Impact of Drain of Wealth on Indian Economy

  • It had impoverished all the section of Indian society with peasants being the worst victims. They bore the brunt of the taxes raised by the Company and later by the Government of India in the form of land revenue.
  • It drained India of its precious capital which could have otherwise been invested in industrialization and modernization of agriculture in India. The drain of Indian wealth became a major source of financing the Industrial Revolution in England and is also the reason why such revolution did not take place in India.
  • Dadabhai Naoroji had estimated that every year, anywhere between 30 million to 40 million pound sterlings were flowing out of India. He described it as the main cause of India's poverty.
  • It also resulted in a 'moral drain' which consisted in exclusion of Indians from position of trust and responsibility in their own land.

Impact of Drain of Wealth Theory on Indian Nationalism

  • The drain theory was instrumental in countering the reason given by the British for the colonial rule which was India being the "White Man's Burden". It became evident that the colonial rule in India was exploitative.
  • The economic criticism of British rule had helped in shattering the myth of benevolence of British administration in India. While the colonial rulers had justified their control over India as means for India's economic development, Indian nationalists were able to counter this by asserting that India was economically backward precisely because of the British rule, the British free trade, industry and capital.
  • It was instrumental in laying the foundations for the demand for Swaraj which was raised by the Extremist leaders such as B.G.Tilak. The demand for Swaraj, mentioned in the 1906 session of the Congress at Benaras, can be seen as a direct outcome of the drain theory.
  • It was successful in capturing the imagination of peasants for whom the drain was an easy concept to comprehend. It was thus helpful in expanding the mass base of the freedom struggle.

Drain of wealth theory highlights the mercantile character of British rule in India that was inherently exploitative. It shook the myth of Britain's benevolence and laid strong foundations for ensuing freedom struggle.

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