The direct consequence of colonial economics was the outflow of India’s wealth to Europe, a process that is widely recognized as the Drain of Wealth. In the second half of the eighteenth century, especially after the Battle of Plassey, the British East India Company established its dominance in India’s politics, albeit indirectly. By establishing this political dominance, the British transferred a huge amount of India’s wealth to their own country. Historians and sociologists termed this regular outflow of wealth from India as the “Drain of Wealth Theory” or ‘Economic Drain Theory.”
The term “Drain of Wealth” was first used by British economist Adam Smith in his book “The Wealth of Nations” published in 1776. The “Drain of Wealth” theory was first presented in India by Dadabhai Naoroji in 1867. In his book “Poverty and un-British rule in India” published in 1901, he mentioned the Drain of Wealth theory and stated that the main cause of India’s immense poverty was this Drain of Wealth.
On 2nd May 1867, at a meeting of the East India Association in London, Dadabhai Noroji first presented the argument that England was enriching the motherland by extracting wealth from India as the price of ruling India, and as a result, India was suffering from financial emptiness. Along with Noroji, Justice Mahadev Govind Ranade and Bholanath Chandra presented similar arguments. Later, Romesh Chunder Dutt strongly presented this Drain of Wealth theory in his published book “Economic History of India” and commented with resentment, “Verily the moisture of India blesses and fertilizes other lands.”
What is Drain of Wealth Theory?
- By Drain of Wealth Theory, we understand when a colonial power exercises political authority over a colony and takes its wealth to its own country, gives nothing in return to that colony, and invests the capital collected from the colony in unproductive areas of the colony, which never contributes to overall financial development.
- After the Battle of Plassey in 1757, home charges, administrative expenses, and all surplus money from trade were sent to England throughout the eighteenth century to repay India’s increasing debt. Additionally, illegal commerce, hundi, smuggled diamonds, and employee salaries were smuggled to England through unnamed trades. Dadabhai Noroji named this phenomenon the ‘Drain of Wealth.’ Romesh Chunder Dutt made the same statement. Among other historians, Sabyasachi Bhattacharya called it ‘wealth exodus,’ ‘wealth outflow,’ and ‘wealth drainage’; economist Amlan Datta termed it ‘plunder,’ and Brooks Adams named it ‘Plassey Plunder.’
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Process of Drain of Wealth
The process of Drain of Wealth was of two types; the nature of Drain of Wealth during the East India Company period was different from that during the British government period after 1858.
- The East India Company mainly drained wealth in three ways: through money paid as salaries and gifts to company employees, through money earned from company employees’ personal trade and anonymous trade, and through the company’s public policy, which increased the amount of financial outflow from India. Due to the company’s commercial policies, India’s wealth rapidly flowed out in the second half of the eighteenth century.
- The most important role in the outflow of India’s wealth was played by the East India Company’s ‘investment’ for trade in India. In the early days of the company’s rule, the main problem was that while there was sufficient demand for Indian cotton textiles and silk industry products in England and European markets, there was no demand for English or European manufactured goods in India. As a result, the company would buy these products, especially textiles and silk, from India using precious metals for export to European markets. The expenditure that the company made to purchase these commodities was called ‘investment.’ Until 1757, the Company would import precious gold and silver or bullion to India for buying these products.
- The situation began to change after the Battle of Plassey. When the Company obtained the Diwani of India in 1765, they used the money collected from India’s land revenue to buy goods and send them to England. This was the beginning of the Drain of Wealth. Later, when Manchester’s machine-made cloth destroyed India’s textile industry, the trade relationship between England and India had to be reorganized. From the mid-nineteenth century, products like cotton from western India, jute from India, tea from Assam, wheat from Punjab, and oilseeds from South India started being sent to England. The balance of foreign trade was in India’s favour. According to nationalist writers, this too was a form of Drain of Wealth.
- After power was transferred from the Company to the British government, the nature of the Drain of Wealth changed. Although there was no longer the responsibility to bear the expenses of the East India Company’s office in London or pay dividends to its shareholders, all expenses of the India Secretary’s India Office were recovered from India. On the other hand, the enormous amount spent to suppress the Great Revolt of 1857 was also recovered from India as state debt. The burden of compensation for the Company’s dissolution was also imposed on the Indian people.
- Moreover, the salaries, various allowances, savings, etc, of the British officials who held various government and private positions in India were all sent from India to England. British capital was invested in establishing railways in India. The interest that had to be paid on this also went from India to England. Again, India had to pay for all the items that came from England for the government stores or warehouses of India.
- In this way, nationalist historians had calculated how much money was being transferred from India to England through various sectors. The calculations, however, differed from person to person. Examining the statistics of imports and exports from India between 1835 and 1872, Dadabhai pointed out that the value of exports exceeded imports by more than 500,000,000 pounds. In a letter sent to the Daily News on April 3, 1905, he pointed out that during 10 years from 1892 to 1899 and 1902 to 1903, England imported from India goods worth 4,988,913,359 pounds and exported goods worth 3,421,438,153 pounds, thereby making a net gain of 1,467,441,206 pounds. The average drain in India was 34 million pounds.
- According to Dadabhai Naoroji, this Drain of Wealth occurred primarily in several phases, which were: Firstly, whether in England or India, various types of demands of European officials were met with Indian money. Secondly, pension payments to British officers, and thirdly, money was sent from India to England for the maintenance of British troops in India. Additionally, in 1905, Dadabhai Naoroji declared that goods worth 51.5 crore rupees annually were being exported outside India.
- At the Indian National Congress session in 1901, DE Wacha stated that the amount of wealth drained was between 30 to 40 crore rupees annually. According to Romesh Chunder Dutt, 10 million pounds annually went outside India.
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Historical Debates on Drain of Wealth Theory
- There are various disagreements among historians about whether the Drain of Wealth Theory or the Economic Drain actually occurred. In the book “The Economic Transition in India,” published in 1911, Theodore Morison, and later ICA Knowles and Vera Anstey, strongly criticized the Drain of Wealth Theory. According to Theodore Morison, it was not true that India suffered financial loss due to the export of goods by the company and its employees, whether legally or illegally. According to him, India should have benefited when exports exceeded imports; there was no possibility of loss. Many people were employed and benefited from exports. The silk, weaving, and sugar industries expanded based on the import and export of goods from India. Many people found employment due to increased ship traffic at ports.
- However, against Morison’s view, it is said that the increase in exports of India’s goods did not benefit India’s merchants, weavers, and other producers. Because the East India Company and its employees did not buy things at fair prices. Through the Dadni and agency system, they destroyed Indian merchants and producers to fill their own coffers. Due to the company’s monopolistic trade, the people of this country were exploited and oppressed. James Stuart said that India did not become wealthy due to exports.
- According to P.J. Marshall, if there was an economic drain from India, it was not one-sided. In return, India benefited in many ways. The East India Company provided India with several services. The company spent a portion of its earned income in various sectors in India, such as insurance, banking, agency houses, railway expansion, improvement of irrigation systems, the shipping industry, the application of Western technology, etc. Even the company’s army protected India from foreign attacks, which meant there was no need to maintain a separate army. Some of the company’s profits were also spent on India’s social and cultural development. Therefore, according to him, it cannot be said that India only suffered losses.
- Many historians did not accept the above opinions. According to Jogesh Chandra Singha, from 1757 to 1780 AD, 3,84,00,000 pounds were drained from India for the Company’s various expenditures. But in return, India received neither gold and silver nor any services for government administration. Only some highly paid European officials were appointed in India. After 1813 AD, a large amount of money had to be sent to England from India as home charges.
- Brooks Adams also said that the wealth from India provided capital for the Industrial Revolution in England. Although many did not accept this opinion. But the real point was that the East India Company did not spend even half of what it took for India’s development. According to nationalist historians, the main cause of India’s poverty was the drain of Indian wealth due to British government rule. They also said that the government’s main objective was to invest the money earned from India to purchase Indian goods.
- Holden Furber, in his book “John Company at Work,” showed through calculations that through the East India Company’s ‘investment’ and export of gold and silver to China, 1.78 million pounds of wealth were drained annually from India between 1783 and 1784 and between 1792 and 1793. According to him, between 1813 and 1822, the annual amount of India’s financial drain was between 3 million to 4 million pounds. In 1801, Irfan Habib said that 4.2 million pounds were drained from India to England.
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Impacts of Drain of Wealth
- After the Battle of Plassey, the plunder and drain of wealth from India damaged India’s economy in various ways. Since the capital for export trade was collected from India, the British Company and other European companies stopped importing gold and silver from abroad. Along with that, the East India Company also exported a large amount of India’s gold and silver to China for conducting trade with China. On one hand, due to the blockage of these two metals’ incoming path, and on the other hand, the massive outflow of these two metals to China, the supply of gold and silver in India decreased.
- As a result, the money supply in India’s internal economy decreased, and a severe currency crisis emerged. Moreover, due to the outflow of huge amounts of money through gold, silver, and goods, India’s economy became stagnant. This economic stagnation created unwanted pressure on the money market. RC Dutt, while discussing the adverse effects of the drain of wealth, said that due to the outflow of the country’s wealth, the financial drain was so extensive that if it happened to the world’s most prosperous countries, they would also become poor. This incident turned India into a country of famines.
- While the financial drain from India made India poorer, there is no doubt that it made Great Britain more prosperous. Rajani Palme Dutt, in his book “India Today,” said that modern England was built in the second half of the eighteenth century based on wealth appropriated from India. Karl Marx, in the third volume of his “Capital,” said that the wealth drained from India was converted into capital in England. The wealth shipped from India made a class of people in England wealthy, and they invested that money in industry and trade. Therefore, it cannot be denied that the wealth extracted from India served as one of the sources of capital needed to develop the Industrial Revolution in England.
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Drain of Wealth Theory FAQ’s
What is Drain of Wealth?
The Drain of Wealth is the direct consequence of colonial economics, where a colonial power exercises political authority over a colony and takes its wealth to its own country, gives nothing in return to that colony, and invests the capital collected from the colony in unproductive areas, which never contributes to overall financial development.
Who proposed the Drain of Wealth Theory in India?
Dadabhai Naoroji first proposed the Drain of Wealth Theory in India in 1867.
What does the term Drain of Wealth mean?
The term Drain of Wealth means, a colonial power controls a colony’s politics and transfers its wealth to their own country.
In which book Dadabhai Naoroji mentioned about Drain of Wealth theory?
In the 1901 book “Poverty and Un-British Rule in India,” authored by Dadabhai Naoroji.
