Economic Drain from India: Concept, Extent and Consequences

In this article we will discuss about the economic drain from India:- 1. Concept of the Drain 2. Extent of the Drain 3. Constituents of the Drain 4. Critics and Drain Theory 5. Consequences of the Drain.

Contents:

1. Concept of the Drain
2. Extent of the Drain
3. Constituents of the Drain
4. Critics and Drain Theory
5. Consequences of the Drain

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1. Concept of the Drain:

The central point of the drain theory is that a portion of the national product of India was not available for capital formation or consumption by her own people but was drained away to England for political reasons without getting an adequate economic, commercial or material return.

In other words, it was a unilateral transfer of wealth from India to England. The drain took the form of an excess of exports over imports—the difference between exports and imports being a broad measure of the drain.

Economic drain had two aspects:

1. External and

2. Internal.

External drain occurred through a unilateral transfer of goods to England and would have been impossible without an internal drain. In fact, as Ganguli says, the internal drain may be regarded as the contingent effect of the external drain.

In order to meet the external drain, commodities such as food-grains and raw materials were extorted from the rural areas by oppressive land revenue, irrigation rates, salt tax and other levies which compelled the cultivators to sell their crops which were exported.

This is what happened during the depression of 1930’s when large quantities of ‘distress gold’ flowed from the rural to the urban areas from where it flowed out again to England. So, just as there was a unilateral transfer of wealth from India to England, so was there a transfer from the poor rural areas to the relatively affluent urban areas. This was the internal drain.

In addition, there was a moral drain also which implied the loss of skill and experience in administration and knowledge of high scientific and learned profes­sions when Englishmen possessing them retired to England.

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2. Extent of the Drain:

Estimates of the drain differ from person to person and also from year to year because, firstly, the drain itself was increasing from year to year and, secondly, different persons used different methods of calculation. No firm estimates are AVAILABLE regarding the amount of tribute exerted by the East India Company prior to its passing into the hands of the British Crown.

However, according to William Digby, “probably between Plassey and Water-loo (1757-1815) a sum of 1000 million pounds sterling was transferred from India to English Banks”.

From 1834 onwards, a number of reliable estimated were made by both British and Indian authorities. Montegomery Martin, writing in 1828, estimated the drain at £30 million a year. Dadabhai Naroji’s estimates were the most intricate for he continuously changed their basis. In 1867, he put the amount of the drain at £8 million but finally settled for nearly 34 million in 1905.

In recent years, Messrs Shah and Khambatta reckoned it at £ 146.5 million for 1921-22 while Visveswaraya, calculating it for the year 1934, reached the figure of £ 121 million which was “exclusive of official remittances to England for pension, other Home charges and liabilities to non-Britishers who had trade relations with India”.

Pavlov concludes that during the 1930’s, the British annually deprived India of £ 130-140 million in pure tribute alone.

With this amount, India could annually construct three plants of the Bhillai type, each exceeding in capacity the country’s Iron and Steel industry in the pre-colonial period. After a detailed analysis of the problem, Prof. C.N. Vakil came to the conclusion that the total economic drain from 1834-1924 was between £ 394 million—£ 591 million.

Working on the basis of Vakil’s figures, Dr. Bhatt calculates that, at 1962-63 prices, the total drain from 1757-1939, on Govt. account alone, amounted to £ 6000 million or about £ 30 million a year. To this may be added part of the remittances by private parties. This comes to roughly 2-3% of India’s National Income during 1757-1939.

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3. Constituents of the Drain:

While the form the drain took was that of an excess balance of trade, what was its genesis? In other words, what was drain due to?

Before 1833, the drain consisted of:

(a) Outright tributes paid by Indian rulers and

(b) Investment of surplus revenue of Bengal in exports from India by the company after the grant of ‘Diwani’ and payment of dividends to its shareholders.

It was supplemented by the export of bullion to China, remittances of private fortunes accumulated by the company’s servants through a process of undisguised looting, and by the abuse of ‘Dastak’. After 1833, the problem became much more complex and open to dispute since there was no visible tribute paid by India to England nor was there any transfer of surplus revenue from India to the British treasury.

It mainly consisted of:

(i) Home charges

(ii) Interest and profits on private foreign capital,

(iii) Banking, insurance and shipping charges.

Home Charges:

The fountain head of the drain was the salary of England for ruling over India, called the Home charges. Home charges refer to the expenditure incurred in England by the secretary of slate on behalf of India. Before the Mutiny, they varied from 10-13% of the average revenue of India.

After the Mutiny, the proportion shot up and stood at 24% in the period 1897-1901. The burden further increased in the 20th Century when home charges constituted 40% of the total revenues of the Central Govt. In 1921-22 and 36% in 1938-39.

The main com­ponents of the Home Charges are examined below:

(a) Dividend to the proprietors of the East India Stock:

With the initial capital of a bare 6 million pounds, the East India Company “traded like rulers and ruled like merchants”. Under the charter Act of 1833, the company was stripped of its commercial functions but in order to protect the interests of the proprietors, it was decided to pay, out of the revenues of India, an annual dividend of £6.30 lakhs to the stock holders of the company.

The company’s debts and liabilities were also charged to India. This included the commercial as well as the territorial debt of the company. As a result of this arrangement, India paid the annual dividend of £ 6.3 lakhs for forty years plus interest on a loan of £4.5 million raised in 1874 to redeem the stock of the company.

The injustice involved in the arrangement is so open and manifest that even Dr. Anstey concedes that these “ought never to have been charged to the Indian revenues”. This was a tribute and a drain on Indian resources.

(b) Interest on Public Debt:

Before the Mutiny, the public debt of India was due partly to wars both in and outside India and partly to Home charges. It represented the money with which India was conquered. It amounted to £37 million in 1834 when the company ceased to be a commercial body. It rapidly rose to £49.2 million in 1856 and £93 million in 1860.

This great increase of about £44 million represents the cost of suppressing the mutiny which was debited to India. The debt went on multiplying reaching £234 million in 1900 and £274 million in 1913. The main causes were the redemption of the East India stock in 1874; famines during 1874-77 and 1896-1900, the Second and Third Afghan wars, and the Forward Policy in the N.W.EP.

Then came the I world war when a special contribution of £100 million was made. The series of unprecedented deficits since 1918, ag­gregating £ 66.6 million up to 1923, further pushed up the figure. The true origin and nature of the public debt is thus explained. This large public debt involved an equally large interest liability also—the total interest payments on sterling debt alone being £ 321.6 million during 1860-1920.

The contention of Anstey that most of the public debt of India, especially in the later part of the 19th Century, was on account of increased expenditure upon public works belies the facts.

Even if debt due to productive works, Forward policy and famines is excluded, still a large portion of the interest charges on the sterling debt up to 1915 was due to the fact that India was paying, for the cost of her own conquest by the British.

This was totally unjustified and clearly a drain on India’s resources. The remaining portion of the interest charges on sterling debt could have been reduced if Indian revenues had not been recklessly wasted and if the policy of raising loans in India had been adopted.

(c) Guaranteed interest on Railways and irrigation Revenue Account:

The guaranteed interest on capital borrowed for railway and canal works amounted to, an on-average, £ 3.5 million during 1861-74 and £ 9.6 million during 1914—1920.

It is argued by Anstey that the public works in India, constructed either by companies or the slate, had, in all cases, contributed Lo welfare of the country, that the extension of communication increased her trade and that the railways and irrigation works were of great help in times of famines and that, therefore, the price paid by India in the form of interest charges on the Capital invested in these works was not great in comparison with the benefit received.

The question, however, is whether these benefits could not have been obtained at a cheaper cost? If the mistakes connected with the Guarantee system had not been committed, if the construction of public works by the state had been carried without undue hurry and waste, if Indian capital had been used to a greater extent, the charges in England to these works would have been greatly reduced.

The capital used in excess of requirements and interest charges on the same were, therefore, in the nature of the drain.

(d) Civil Expenditure:

This included many items, large and small, such as the India office es­tablishment, Mission to Persia and China, Pensions and furloughs, superannuation allowances of the British employees of the govt. It was unjust to charge India for the maintenance of the India office in England whose main function was to look after and protect British interest, more so when other British colonies were not being similarly charged.

The missions to Persia and China were likewise maintained for Imperial purposes but India alone, of all colonics, was made to contribute for their maintenance. Although the inequity was later removed in the case of China and Persian missions, India continued to pay a major part of the expense of the India office establishment and this was a drain.

As regards expenditure on pensions, furlough allowances and other funds instituted for the benefit of the English employees, this was clearly a strain and a drain on Indian resources. For example in 1902-3 the sum paid as pensions and furlough allowances in England alone came to 12% of the net annual revenues of India.

As Gadgil points out, the reason was that the salary scales of British employees were fixed at a level which had no relation to the economic life or financial resources of the country. The highest judicial officer in Algeria, for instance, received £72.0 per year and a furnished house.

The chief justice of Bangal, on the other hand, earned £4911 including exchange compensation allowance. These payments, being fixed in sterling, constituted a drain on Indian resources. An additional burden was imposed whenever there was a fall in the value of the rupee because the govt. then had to find more rupees to meet these charges.

The burden was all the greater when the govt. allowed a privileged rate of exchange for transferring these payments to England. This not only raised the amount of sterling payable in respect of each pension but it stimulated early retirements and transfer of pensions from India to England.

It is evident that the large and growing expenditure under this head and the consequent drain would have been materially reduced if Indian people had been employed to a greater extent in higher services.

(e) Military and Marine:

The charges under this head included the pay, furlough allowances and pensions of the British military and naval personnel, contribution to military service funds, charges for the transport of troops and cost of foreign wars. These charges, which arose solely because India was not a free country, contained elements of both tribute as well as drain.

All charges imposed on India for the campaigns in Abyssinia, Parak, Malta, II Afghan war, Egypt, Sudan, Burma were clearly a tribute extracted from India because these campaigns were undertaken for purely British interests. Even otherwise, defence expenditure was quite dispropor­tionate to India’s needs, capacity, and resources.

India had to bear the cost of recruitment and training of British army personnel posted to India. She was also under obligation to disburse their pay and allowances at British rates. The transport service organised for carrying British troops from England to India and back was another heavy charge.

That is why an ordinary British soldier cost as much as an Indian officer Vakil aptly sums up the position when he says that the British soldier was recruited at India’s expense; was brought to India at India’s expense; was given valuable field experience at India’s expense; was sent back home at India’s expense to join the Reserve forces of England.

To the extent the pension, furlough and other charges could have been reduced by the employ­ment of Indians in the higher military service, there was drain from India.

(f) The Purchases of Stores:

It formed a small part of the Home Charges, the annual average varied between 10—20% of the total amount of the Home Charges between 1861—1920. These stores were purchased for the Military, Civil and marine departments.

The expenditure on stores was the only item in the Home charges where a material return was obtained. So long as these stores could not be manufactured in India, this expenditure was quite proper.

However, the govt’s policy was to indent for all stores in England, even for those which were available in India. The dis­crimination was so glaring that even Dr. Anstey feels that “more articles of Indian make could have been purchased.”

Even though the store-purchase policy was somewhat liberalised in the 20th century, yet the overall attitude towards industrial development was unsympathetic if not hostile. Therefore, the drain on this account continued. There is, however, the difference that in this ease we had the compensation of getting material goods in return even though at a higher price.

(ii) Interest and profits on Private Foreign Capital:

Interest and profits on private foreign capital were important leakages from the national income stream. These payments, roughly varying between £20—40 million per year in the inter-war years-imposed a heavy burden on the country.

In contrast to their role in white men’s colonies, foreign capitalists, in India did little to promote genuine industrial development of the country. Rather, they exploited Indian resources for their own benefit and checked the growth of domestic enterprise by means, fair or foul, with a view to retaining their stranglehold on Indian economy.

(iii) Foreign Banking, Insurance and Shipping charges:

Banking, Insurance and shipping were other services for which India had to make a payment abroad. Messers Shah and Khambata estimated that in 1921-22, a sum of £27.7 million was paid on account of freight and passenger carriage to foreign companies while another £10 million was paid on account of banking commission.

Evidently, these charges were heavy and a burden on India. To the extent India could become self-sufficient in this vital sphere and reduce her expenditure on these services, there was an-element of drain in these payments.

Loss due to Exchange:

The real burden of the drain was increased many times by the considerable fall in the gold price of silver in 1873. This meant that the govt. required more- rupees for the payment of the Home & other charges. The total loss on this account alone amounted to £162 million between 1875—1898.

The argument that the loss by exchange was ‘incidental to the administration’ and beyond the control of the govt. is not tenable. During the long period, when the price of the rupee was falling, the Govt. knew that an addition to their Sterling expenditure was a source of danger and difficulty. It ought to have, therefore, made efforts to reduce their Sterling obligations.

It instead increased them, Loss by exchange had to be made good by increased exports which, in turn, were induced by higher taxation which restricted domestic consumption. The above review shows that the element of drain was present in all these items in the sense that an independent India would not have been called upon to make these payments.

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4. Critics and Drain Theory:

The refutation of the theory began almost simultaneously with its enunciation. Interestingly enough, there was broad agreement on the existence of the drain. What was contested was that “it did not consist of the total sum involved” or that it was ‘exaggerated’ or ‘over-estimated.’

Some critics like Morrison ‘ and Lord Curzon referred to the import of bullion into India as a proof of an inward drain rather than outward drain. The fact, however, is that India did not receive adequate bullion in lieu of her export surplus. Besides, whatever bullion came was needed for Industrial and financial purposes.

In the early days of the British, rule, India was depleted of its precious metals to such an extent as to greatly diminish its quantity in the country. Some gold and silver was required to restore the balance.

Further, the commercialisation of agriculture and the new system of payment of revenue in cash also resulted in an increased demand for money. This is confirmed by the Herschell Committee which found that between 1870-71 to 1892-93, “nearly the whole of the imported silver had passed through the mints”.

In the 20th century also, India’s import of bullion did not offset her export balances. For example, India imported precious metals worth Rs. 53 crores during 1920-21 to 1945-46 against her net export surplus of Rs. 1394 crores. In other words, import of precious metals constituted less than 4% of the export surplus.

It was suggested that India’s connection with England enabled her to borrow in the cheapest market. Morrison goes to the extent of asserting that the saving on account of the cheapness of the debt “was not very far from being enough to wipe out the whole of the political drain”.

These critics forget that many of these loans were not required at all by India and most of them were not usefully employed. Moreover, even if a higher interest had to be paid on loans raised in India, at least it would have remained and fructified in India while even the lower rate, on foreign loans, produced a drain.

Anstey herself is doubtful whether or not it was—”in India’s interest to raise these loans in England rather than in India”.

Anstey’s argument that the railways and irrigation works constructed with foreign capital ‘were of immense benefit’ to India does not carry much conviction because their construction was undertaken primarily to serve the wider interests of England.

As PR Brahmanand puts it, they were a necessary ‘concomitant of Imperialism’. They were designed, laid and worked for the benefit of England. That is the reason why they failed to give rise to a flood of ‘Satellite innovations’ and destroyed more employment opportunities than they opened up. In this respect, even Marx proved a false prophet.

Critics often compared India’s position in respect of her export surplus with that of U.S.A. America also had a large export surplus due to its indebtedness to European countries and yet was flourishing precisely because it was utilizing foreign loans to make good the paucity of its own resources. Therefore, Morrison argues that (he political status of a country had nothing to do with the existence of the export surplus.

In reality, India’s case was not comparable with that U.S.A. because, except in the 1840’s, America was an importer of capital throughout the 19th century. Her export surplus arose after 1873 and not in the early stages. Secondly, the export surplus of U.S. represented either payment for loans it had taken in the past or, alternatively, it represented deferred receipts.

In the case of India, however, the exports were not paying for past loans nor were the surplus a future claim over other countries. In other words, India’s surplus was a capital transaction without any past or future. It was extinguished in the present just at the time of its creation and was a dead loss to the country.

Regarding the remittance of savings and pensions by Europeans employed in India, the critics agree that India’s case was different from other countries.

Anstey’s apology however, is that these charges were not large, and what is more, India received, as compensation, the advantage of the services of ‘hardwork­ing, selfless and efficient’ officials of every kind and description and also non-economic welfare in the form of peace and security….. in other words, ‘good govt.’ favourable to economic evolution and cheaper than what she could herself pro­vide.

While employment of technicians could not be objected to, a large part of the military and civil services were not maintained for India’s benefit but for purposes that served the interests of Britain and its citizens. Regarding the es­tablishment of peace and security, critics overlook the fact that India needed to be defended against one aggression only that of the British Imperialism.

As against the advantage of employing-British citizens, there was the disadvantage of loss of skill and experience and of a nation condemned to an inferior status in its own country.

As for the assertion that India received an administration favourable to economic development, the economic history of India bears testimony to the hostility of the British Govt. towards the development of this country. Not only that no step was taken to promote it but everything possible was done to check, retard, and stifle it with all the weapons at the command of an Imperial power.

The assertion that a major portion of India’s debt was productive which since 1900 “brought in considerably more revenue than sufficed to cover the interest charges” also cannot be accepted. The fact is that a major portion of India’s debt was political in nature and useless, inessential, and unproductive in character.

It came into existence during the rule of the East India Company in order to meet the expenses of the wars leading to the conquest of India, to pay the company’s dividends and to buy its stock and to meet the cost of the suppression of the revolt of 1857. The cost of servicing this debt was an obvious drain on the resources of India.

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5. Consequences of the Drain:

The most important evil resulting from the drain was impoverishment of the country. It meant a direct transfer of a part of the domestic product to England. Even if the drain had no other economic effect, the sheer reduction of the national product was large enough to make it a major cause of the poverty of India.

It checked and retarded capital accumulation in the country by removing a large part of its currently accumulated capital to a foreign land. In this respect, it was at least partly responsible for India’s inability to embark on industrialisation.

This had an important, though harmful, effect on income and employment within the country.

R.C. Dutt rightly observes:

“When taxes are raised and spent in a country, the money circulates among the people, fructifies trade, industries and agriculture, and in one shape or another, reaches the mass of the people. But when taxes raised in a country are remitted out of it, the money is lost to the country for even it does not stimulate her trades or industries or reach the people in any form”.

In short, the multiplier effects of the expansion of invest­ment were lost to the country.

The drain facilitated the penetration and exploitation of India by foreign capital. Firstly, by preventing the accumulation of capital in India, the drain permitted foreign capitalists to come to the country without having to face in­digenous competition.

They, therefore, monopolized and reaped all the ad­vantages of India’s material resources. Secondly, the drain acted as a major source of the accumulation of British Capital invested in India because a large part of the drain was brought back to India as foreign capital.

As R.C. Dutt pointed out, financially, the drain was met directly from the public revenues whose largest constituent was land revenue. Cultivators had to sell a large part of their produce to pay land revenue; this produce was exported because the country had to create the required export surplus.

Thus, through the mechanism of land revenue, the peasant was forced both to pay for the drain and to provide the agricultural products through which it was remitted. The result was that he was, on the one hand, starved of food grains which he was expected to export and, on the other, impoverished by the heavy land revenue. This started land of productive capital resulting in agricultural stagnation.

Apart from the direct loss resulting from the unilateral transfer of capital, the drain produced the secondary injury of worsening India’s terms of trade with foreign countries by giving a compulsory character to her exports. India, in her drive to export or perish, had to depress the prices of its exports to persuade foreign buyers to purchase them. This was an additional loss to her.

The Govt’s concern for meeting its ever-increasing Home Charges was a predominant factor in shaping India’s currency policy. The tying of the rupee to the chariot-wheel of the sterling since 1898-99, and efforts since then to maintain the Sterling value of the rupee stable at an artificial rate, maintenance of Sterling Reserves in London, refusal to accept devaluation as a measure to lift the economy out of the depths of the world depression and refusal to slop unprecedented exports of distress gold etc.—all arose from the concern of the govt. to be able to pay ‘Home Charges’.

Exclusion of Indians from the govt. of their country meant loss of all experience and knowledge of administration or legislation, of high scientific and technical professions thereby preventing skill-formation in the country.

To sum up, the drain is a remarkable illustration of the operation of Imperialism. It exposed, as nothing else could, the exploitative nature of the British rule and, in the process, it lays bare one of the most important causes responsible for reducing the once ‘Sone Ki Chidya’ (Golden Sparrow) to a condition of abject poverty and destitution.

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