Drain of wealth

Drain of wealth

  • The constant flow of wealth from India to England for which India did not get an adequate economic, commercial or material return has been described by Indian national leaders and economists as ‘drain’ of wealth from India. The colonial government was utilizing Indian resources- revenues, agriculture, and industry not for developing India but for its utilization in Britain. If  these resources been utilised within India then they could have been invested and the income of the people would have increased.
  • The drain of wealth was interpreted as an indirect tribute extracted by imperial Britain from India year after year.


  • In the mercantilist concept an economic drain takes place if gold and silver flow out of the country as a consequence of an adverse balance of trade. In the 50 years before the battle of Plassey, the East India Company had imported bullion worth £ 20 million into India to balance the exports over imports from India. British government adopted a series of measures to restrict or prohibit the imports of Indian textiles into England.
  • Apart from other measures, in 1720 the British government forbade the wear or use of Indian silks and calicoes in England on pain of a penalty on the weaver and the seller.

Early Drain of wealth:

  • After Plassey the situation was reversed and the drain of wealth took an outward as England gradually acquired monopolistic control over the Indian economy.
  • So, the ‘Drain of wealth’ from India to England started after 1757 (Battle of Plassey), when the Company acquired political power and the servants of the Company a ‘privileged status’ and, therefore, acquired wealth through dastak, dastur, nazarana and private trade.
  • After the East India Company extended its territorial aggression in India and began to administer territories and acquired control over the surplus revenues of India, the Company had a recurring surplus which accrued from:
  1. profits from oppressive land revenue policy,
  2. profits from its trade resulting from monopolistic control over Indian markets,
  3. exactions made by the Company’s officials.
  • This entire ‘surplus’ was used by Company as an “investment” i.e. for making purchases of exportable items in India and elsewhere. Against the exports of goods made out of this ‘investment’, India did not get anything in return.
  • This is how there began the ‘Drain of Wealth ‘which was nothing but a unilateral transfer of fund; the Early nationalist leaders made this point central to their economic criticism of the British colonialism.

Dadabhai Naoroji’s theory of the Drain of Wealth

  • Dadabhai Naoroji was the first man to say that internal factors were not the reasons of poverty in India but poverty was caused by the colonial rule that was draining the wealth and prosperity of India. The drain of wealth was the portion of India’s wealth and economy that was not available to Indians.
  • The Drain of Wealth theory was systemically initiated by Dadabhai Naoroji in 1867 and further analysed and developed by R.P. Dutt, M.G Ranade etc
  • In 1867, Dadabhai Naoroji put forward the ‘drain of wealth’ theory in which he stated that the Britain was completely draining India. He mentioned this theory in his book Poverty and Un-British Rule in India. He put forward the idea that Britain was draining and bleeding India and that, too, for nothing.
  • Further in his book , he stated the loss of 200-300 million pounds of revenue to Britain. Dadabhai Naoroji considered it as a major evil of British in India.
  • Naoroji observed in 1880,“It is not the pitiless operations of economic laws, but it is thoughtless and pitiless action of the British policy; it is pitiless eating of India’s substance in India and further pitiless drain to England, in short it is pitiless perversion of Economic Laws by the sad bleeding to which India is subjected, that is destroying India.”
  • On the footsteps of Dadabhai Naoroji, R. C. Dutt also promoted the same theory by keeping it as a major theme of his book Economic History in India.
  • M.G Ranade published books on Indian economics. He also talked about drain of wealth and saw the need for heavy industry for economic progress and believed in Western education as a vital element to the foundation of an Indian nation.
  • John Sullivan, President of the Board of Revenue, Madras, had wrote—”Our 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.”

Dadabhai Naoroji gave several factors that caused external drain. These are:

  1. Home charges refer to the interest on public debt raised in England at comparatively higher rates; expenditure incurred in England by the Secretary of State on behalf of India;
  2. Annuities on account of railway and irrigation works;
  3. Indian office expences including pensions to retired officials who had worked in India or England, pensions to army and navals etc.
  4. Remittances to England by Europeans to their families
  5. Remittances for purchase of British Goods for consumption of British employees in India.
  6. Interest charges on public debt held in Britain
  7. Also, trade as well as Indian labour was deeply undervalued.

Q. What were the constituents of drain of wealth?

  • The drain of wealth mainly consisted of the following:

Home Charges:

  • Home charges refer to the expenditure incurred in England by the Secretary of State on behalf of India. Before the Revolt of 1857 the Home charges varied from 10% to 13% of the average revenues of India. After the Revolt the proportion shot up to 24% in the period 1897-1901. In 1901-02, the Home charges amounted to £ 17.36 million. During 1921-22, the Home charges sharply increased to 40% of the total revenue of the Central Government.
  • The main constituents of Home charges were:
  1. Dividend to the shareholders of the East India Company
  2. Interest on Public Debt rose abroad: The East Indian Company had piled up a public debt to dislodge Indian rulers from their Principalities. By 1900 the public debt had risen to £ 224 million. Only part of the debt was raised for productive purposes i.e., for construction of railways, irrigation facilities and public works.
  3. Civil and Military charges: These included payments towards pensions and furloughs of British officers in the civil and military departments in India, expenses on India Office establishment in London, payments to the British war office etc. All these charges were solely due to India’s subjection to foreign rule.
  4. Store purchases in England: The Secretary of State and the Government of India purchased stores for the Military, Civil and Marine Departments in the English market. The annual average expenditure on stores varied from 10% to 12% of the Home charges between 1861-1920.

Council Bills:

  • Council Bills were the actual means through which money was transferred (It is not a legislation). This also caused drain of wealth. We will try to understand what is Council Bills (Even if you don’t understand, you can leave it).
  • Council Bills are best explained by quoting from Sir John Strachey’s lectures given in 1888. ‘The Secretary of State draws bills on the Government treasury in India, and it is mainly through these bills, which are paid in India out of the public revenues, that the merchant obtains the money that he requires in India and the Secretary of State the money that he requires in England.’
  • In other words, would be British purchasers of Indian exports bought Council Bills from the Secretary of State in return for sterling (which was used to meet the Home Charges). The Council Bills were then exchanged for rupees from the Government of India’s revenues. Next the rupees were used to buy Indian goods for export. Conversely, British officials and businessmen in India bought Sterling Bills in return for their profits in rupees from British owned Exchange Banks; the London branches of these tanks paid in pounds for such bills with the money coming from Indian exports” purchased through-the rupees obtained through sale of Sterling Bills.

Interest on Foreign Capital Investments:

  • Interest and profits on private foreign capital were another important leakage from the national income stream. Finance capital entered the Indian market in the 20th century.
  • Foreign capitalists were the least interested in industrial development of India. Rather they exploited Indian resources for their own benefit and Infact thwarted indigenous capitalist enterprise by fair and foul means.

Foreign Banking

  • For banking, insurance and shipping services India had to make huge payments. Apart from constituting a drain on Indian resources, unrestricted activities of these foreign companies stunted the growth of Indian enterprise in these spheres.

Q. What were the Impact of the Drain Theory in the Growth of Economic Nationalism?

  • Of all the national movements in colonial countries, the Indian national movement was the most deeply and firmly rooted in an understanding of the nature and character of colonial economic domination and exploitation.
  • Its early leaders, known as the moderates were the first in the 19th century to develop an economic critique of colonialism.
  • The focal point of the nationalist critique of colonialism was the drain theory. The nationalist leaders pointed out that a large part of India’s capital and wealth was being transferred or drained to Britain in the form of salaries and pensions of British civil and military officials working in India, interests on loans taken by the Indian government, profits of the British capitalists in India and the home charges or expenses of the Indian Government in Britain.
  • This drain took the form of an excess of exports over the imports for which India got no economic or national return. According to the nationalist calculations, this chain amounted to one-half of the government revenues more than the entire land revenue collection and over one-third of India’s total savings.
  • The acknowledged high priest drain theory was Dadabhai Naroji. It was in May 1867 that Dadabhai Naroji put forward the idea that Britain was draining and bleeding India. From then on for nearly half a century he launched a raging campaign against the drain, hammering at the theme through every possible form of public communication. R.C. Dutt made the drain the major theme of his Economic History of India.
  • He protested that taxation raised by a king is like the moisture sucked up by the sun, to be returned to 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 theory incorporated all the threads of the nationalist critique of colonialism, for the drain denuded India of the productive capital its agriculture and industries so desperately needed. Indeed the drain theory was comprehensive, inter-related and integrated economic analysis of the colonial situation.
  • The drain theory had far reaching impact on the growth of the economic nationalism in India. Banking on this theory the early nationalists attributed the all encompassing poverty not as a visitation from God or nature. It was seen as man-made, and therefore capable of being explained and removed.
  • Based on the drain theory of Dadabhai Naroji, the nationalists came to see the foreign capital in perilous terms. They came to regard foreign capital as an unmitigated evil, which did not develop a country but exploited and impoverished it. Dadabhai Naroji saw foreign capital to be representing despoliation and exploitation of Indian resources.
  • It was further argued that instead of encouraging and augmenting Indian capital, foreign capital replaced and suppressed it, led to the drain of capital from India and further strengthened the British hold over Indian economy.
  • According to them, the political consequences of foreign capital investment were no less harmful for the penetration of foreign capital led to its political subjugation. Foreign capital investment created vested interests which demanded security for investors and therefore perpetuated foreign rule.
  • The drain by taking form of excess of exports over imports, led to progressive decline and ruin of India’s traditional handicrafts. The British administrators pointed with pride to the rapid growth of India’s foreign trade and rapid construction of railways as instruments of India’s development as well as proof of its growing prosperity.
  • However, because of their negative impact on indigenous industries, foreign trade and railways represented not economic development but colonization and under development of economy. What mattered in case of foreign trade was not its volume but its pattern or nature of goods internationally exchanged and their impact on national industry and agriculture. And this pattern had undergone drastic changes during the 19th century, the bias being overwhelmingly towards the export of raw materials and the import of manufactured goods.
  • According to early nationalists, drain constituted a major obstacle to rapid industrialization especially when it was in terms of policy of free trade. The policy of free trade was on the one hand ruining India’s handicraft industries and on the other forcing the infant and underdeveloped modern industries into a pre­mature and unequal and hence unfair and disastrous competitive with the highly organized and developed industries of the west. The tariff policies of the Government convinced the nationalists that the British economic policies in India were guided by the interest of British capitalist class.
  • For the early nationalists the drain also took the form of colonial pattern of finance. Taxes were so raised as they averred, so as to overburden the poor while letting the rich especially the foreign capitalists and bureaucrats to go scot-free. Even on expenditure side, the emphasis was on serving Britain’s imperial needs while the developmental and welfare departments were starred.
  • By attacking the drain the nationalists were able to call into question, in an uncompromising manner the economic essence of imperialism, the drain theory and the agitation by nationalists on economical hegemony of alien rulers over India. The secret of the British power in India lay not only in physical force but also in moral force that is in the belief that the British were the patrons of the common people of India. The nationalist drain theory gradually undermined these moral foundations.
  • The economic welfare of India was offered as the chief justification for the British rule by the imperialist rulers and spokesmen. The Indian nationalists by their forceful argument asserted that India was economically backward precisely because the British were ruling it in the interest of British trade; industry and finance were the inevitable consequences of the British rule.
  • The corrosion of faith in the British rule inevitably spread to the political field. In course of time, the nationalist leaders linked nearly every important question with the politically subordinated status of the country. Step by step, they began to draw the conclusion that since the British administration was only the handmade to the task of exploitation, pro-Indian and developmental policies would be followed only by a regime in which Indians had control over political power.
  • The result was that even though the early nationalists remained moderates and professed loyalty to British rule, they cut at the political roots of the empire and sowed in the land, the seeds of disaffection and disloyalty and even sedition. Gradually, the nationalists veered from demanding reforms to begin demanding self government or swaraj.
  • The nationalists of the twentieth century were relying heavily on the main themes of their economic critique of colonialism. These themes were then to reverberate in Indian villages, towns and cities. Based on this firm foundation, the later nationalists went on to stage powerful mass agitations and mass movements. The drain theory thus laid the seeds for subsequent nationalism to flower and mature.

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