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Every year, India continuously transfers income to England, for which it has not received sufficient amounts of material or return. Indian leaders and economists have described this as a “massive transfer of income from India to England. This was the ‘drain of wealth’ theory. The economic drain that the East India Company caused was an inevitable consequence of its administrative and economic policies. One of the main problems with the colonial government was that it was utilising Indian resources not for developing India but for the benefit of the British. If these resources had been utilised for good within India. Then they could have been invested, and the income of the people would have increased instead of being sent out of the country.
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Early Drain of WealthÂ
After the battle of Plassey, the drain of wealth took an outward turn as England gradually captured monopolistic control over the Indian economy. This allowed them to drain wealth from India, which they would then use to finance their own growth. Company employees gained political power, and the Company itself acquired a privileged status, which allowed them to acquire wealth through traditional ways of trade in India.
The Company’s employees earned large incomes through their participation in internal trade. At the same time, British Free Merchants earned a great fortune through their private trade. The drain of wealth theory was interpreted as an indirect tribute that imperial Britain extracted from India. The practice continued for many years after the prohibition imposed by the Court of Directors in 1766.
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Dadabhai Naoroji’s Theory of the Drain of Wealth
Dadabhai Naoroji was an early pioneer in the study of colonialism and poverty. He was convinced that the main reason behind poverty was 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 foreigners captured.
Dadabhai Naoroji propounded the Drain of Wealth theory in 1867. Many researchers have further analysed and developed it, including R.P. Dutt and MG Ranade. In 1867, Dadabhai Naoroji proposed what is known as the ‘economic imperialism’ theory, in which he stated that British economic policies were completely draining India. He mentioned this theory in his book, Poverty and Un-British Rule in India, and it is also known as the ‘Drain Theory’.
He criticised that out of the revenues raised in India, approximately one-fourth of the money which is raised in India goes to England, which is the main cause of India’s poverty.
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Amount of Drain
Indian leaders estimated that this amount of drain differs from person to person and from year to year.
RC Dutt: One-half of India’s net revenue flows out of India each year, according to R.C. Dutt. This is estimated to be around £20 million in early 20th century British currency.
MG Ranade: He declared that more than a third of the national income of India was taken away by the government in one form or another.
Dadabhai Naoroji: He claimed that approximately one-fourth of the money which is raised in India goes to England, approximately $12 million per year.
William Digby: According to his calculations, the annual drainage was £30 million.
Impacts of Drainage of WealthÂ
The drain affected the country’s prospects of employment and income and its overall economic growth. When taxes paid by the people are spent in the country, the money circulates among the people, which helps grow trades, industries, and agriculture and eventually reaches the people’s masses. Still, when the money is sent out of the country, it does not directly stimulate the trade industries or reach the people in any form, and it does not stimulate the local economy.
The drain of capital to England really stripped India of its productive capital and created a shortage of capital which hindered significant industrial development. This directly impoverished India along with stultifying the process of capital formationÂ
Dutt argues that the drain caused the impoverishment of the peasantry because it primarily flowed out of land revenue.
The wealth of India was the source of financing for the Industrial Revolution in England and is also the reason why an industrial revolution did not take place in India.
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Conclusion
The Drain of Wealth Theory is the idea that a country’s economy can be negatively affected by the outflow of valuable assets, such as money and goods, from the country. This theory is also referred to as “capital flight”. This occurs when Britain decides to move out India’s money and stocks to Britain, where they use it for the betterment of their country. Drain of wealth made a negative impact on the growth of India.
