For several generations now, the name of Dadabhai Naoroji has been associated in the minds of Indian students with the controversial ‘Drain Theory’. He propounded this theory with a fervent missionary zeal. Dadabhai spoke and wrote on this subject in the manner of a crusader who used simple, eloquent and sober language to explain the basic principles of this theory. He used phrases such as the ‘material and moral drain’, ‘the deprivation of resources’, ‘the bleeding drain’, etc.
The British rule drastically affected the
politico-socio-economic structure of India. The various economic policies
adopted by them resulted in poverty and misery of the masses. The British in
India followed a policy which led to the extinction of the self-sufficient
village economy. They evolved a system of education with the main object of
creating a class of clerks so that the British rulers may be able to carry on
the administration. Educated Indians were not given higher posts in the
Government service and administration.
The commercial policy followed by the British rulers was
not determined by the need of the country but was aimed at serving the
interests of England. Of the revenue collected in India, the British remitted
(took) about one-fourth to England as ‘home charges’. Several millions of
rupees were sent to England as private remittances. The British Government in
India followed a policy of free trade which led to free import of foreign
commodities in the country and the ruin of indigenous industries. Railways were
extended to all parts of the country which helped the distribution of foreign
goods from one corner to another and facilitated the export of raw materials to
England. The effects of these developments was that India was the only colony
of the British Empire which presented a scene of poverty and distress and
recurring famines.
With the spread of education people began to analyze the
causes of poverty in India. They realized that there was something fundamentally
wrong with the politico-economic set up of the country. The Indian leaders
observed that the British rule was the chief cause of poverty and misery of the
Indians. They considered ‘freedom from the colonial rule’ as the solution to
the problem. The views of the early nationalist leaders were politico-economic
rather than purely economic. Thus, the economic thought of the Indian leaders
during the early phase of national movement and the Drain Theory propounded by
Dadabhai Naoroji became the economic basis of Indian nationalism.
While in England, Dadabhai Naoroji studied the working of
various British institutions. Along with W. C. Bannerjee, he started the London
Indian Society to bring about a rapprochement between the British and Indians
and to facilitate the exchange of views on subjects related to India. In 1866,
Dadabhai Naoroji founded the East India association in collaboration with
English officers.
Dadabhai Naoroji tried to mobilize public opinion in
England in favor of India. He began to talk about the duties of the Englishmen
towards India. He worked hard to appraise the British people about the defects
of the British rule in India through his speeches in the British Parliament and
through his writings. Dadabhai Noaroji fought for financial justice for India
in the house of Commons. His efforts met with partial success when a Royal
Commission was appointed to ‘enquire into the administration and management of
the military and civil expenditure incurred. However, the Royal Commission failed
to provide any financial justice to India.
After his return to India, Dadabhai Naoroji become the
Dewan of the Baroda State. He was one of the founding members of the Indian
National Congress and was elected as the President of the Congress thrice –
1886, 1893 and 1906.
The most important contribution of Dadabhai Naoroji in the
field of economic thought is his famous ‘Drain Theory’ and its application to
the Indian context. Having read Adam Smith’s ‘An Enquiry into the Nature and
Causes of the Wealth of Nations’, Dadabhai Naoroji turned his attention to ‘An
Enquiry into the Nature and Causes of Indian Poverty’.
He formulated the Drain Theory into a doctrine, a powerful
instrument of polemics which he used with great effect. To strengthen his arguments
Dadabhai Naoroji quoted his predecessors at every step. He knew that he could
succeed in convincing the British rulers if he quoted British rulers if he
quoted British authorities. Some of them were distinguished British
administrators.
External Drain – According to Dadabhai Naoroji, the poverty
of the Indian people was the main problem. That India was getting poorer and
poorer everyday was manifested by a number of facts; the low national income of
the country, the low import and export figures, the low standard of living of
people, the low revenue returns of the government, the recurring famines and
the high rate of morality. He was of the opinion that the existing poverty was
the direct result of the British rule in India. Dadabhai attributed the poverty
of India to the heavy drain of the resources of the country.
Dadabhai considered the economic drain as an
external-cum-internal drain. It was a kind of built in mechanism which exhorted
resources out of a low level colonial economy; and the surplus thus generated
through a complicated process was drained out of the economy through the
process of external trade, the dynamics of which was supplied by the unilateral
transfer of funds in an equally complicated way. According to Dadabhai the
functioning of this transfer of resources was uniquely determined by a member
of objective political factors such as:
-
India being a colonial economy governed by
remote control
-
India was quite unlike whitemen’s colonies as
the temperate zone which was attractive as well as provided capital for
economic development.
-
India was saddled with an expensive civil
administration and equally expensive army of occupation.
-
India was a strategic base of operations that
had to bear the burden of empire building not only in India but also beyond her
borders
-
Overheads of development being oriented towards
strategic requirements, towards the requirements of administrative control in a
vast country ruled by a handful of foreigners, towards the objective of
creating highly paid jobs for foreign personnel
-
India was a colony with a difference, public
expenditure out of the proceeds of taxation and loans failed to generate as
much of domestic employment and income as would have been possible, if the
principle income earners had not been ‘birds of passage’, or if they had spent
their incomes largely within the country or on goods and services produced
within the country.
Dadabhai’s concept of external economic drain had an interesting dimension. The Drain Theory had its crude exponents in his time. keeping money or purchasing power within the country and preventing it from being drained away is a notion which is as old as mercantilism and as old as the nationalist movement in India. Dadabhai grasped the underlying economic reality. He applied the criterion of the effect of public expenditure on the generation of income and employment with the country. Export and import, if they are a foreign monopoly, yield profits which do not generate domestic incomes and employment abroad. Here is a ‘foreign leakage’ to use a modern expression, or a ‘drain’ as Dadabhai understood it. The Englishman who imported British goods for his personal consumption or brought British goods in India, or the Government which bought in India or in England, stores of British manufactures. In these cases, individual as well as public consumption failed to generate domestic income and employment.
Internal Drain – According to Dadabhai Naoroji, the
external economic drain was the counter part of the internal economic drain, as
he saw the internal economic drain as the dependent effect of the external
economic drain. Resources abstracted from internal production through taxation
took the form of commodities which, in real terms, were the equivalent of the
transfer of income abroad. Public finance i.t. government spending in relation
to loan and taxes becomes in this context a means of establishing an
equilibrium between the quantum of transfer of purchasing power abroad and the
quantum of purchasing power required to be diverted from consumption of
taxation and loans. Since the quantum of external transfer was large in
relation to the per capita income, there was a kind of precarious equilibrium
between the internal transfer of income and the external transfer.
The chief argument of Dadabhai was that the internal
transfer was as much of an economic drain as the external transfer. The
external economic drain was a ‘drain’ because of unrequited exports, ‘noncommercial’
exports, which did not bring any return in the form of imports. The internal
economic transfer through taxation, which meant, by and large, transfer of purchasing
power from the poverty stricken, rural areas of the country, was also largely
of the nature of unrequited exports to England. There were other kinds of leakages
which occurred under more favorable political and economic conditions. They produced
compensations in different ways. The familiar examples were the compensatory
effects of redistributive taxation, or welfare expenditure including state
expenditure, on the creation of economic and social overheads which benefit the
bulk of the population, or at least the expenditure of proceeds of taxation
largely within the country which create primary employment and income and
through them secondary employment and income and, so on down to the tertiary
level. Dadabhai pointed out that Indian public finance lacked these
compensatory features except in so far as the state undertook public
investments in railways and irrigation works and road development due to
various reasons their fullest possible compensatory effects were not realized.
Thus, Dadabhai had a very grim view of Indian public finance. The view of
Dadabhai Naoroji was shared by liberal minded Englishmen in the middle of the
19th century who had a sympathetic understanding of the reality of
the Indian economic situation.
The views of Dadabhai Naoroji on public expenditure had
crystallised as early as 1871 in his paper called ‘Commerce of India’ and
‘Financial administration’. In his ‘Commerce of India’ he referred to the
political debt of 100 million pounds and the burden of ‘Home Charges’, pointing
out that while British Exchequer contributed nearly three million pounds to
meet public expenditure in the colonies, in case of India, it was an
unmitigated drain. He criticized the economically crude and unintelligent
policy of making present generation pay the whole cost of public works for he
benefit of the future. This he considered as the lack of ‘intelligent
adaptation of financial machinery’ and much ‘reckless expenditure’.
Dadabhai made a thorough analysis of the inequitable burden
of military expenditure borne by India. He pleaded that the cost of British
Forward Policy should not substantially be borne by India. Dadabhai agreed that
India might pay a share of the cost in India for what England regards as
absolutely necessary for her own purpose of maintaining her empire in India.
The increase in the public debt was considered another
source of the swelling of the economic drain by Dadabhai Naoroji. Apart from the
political debt inherited for the East India Company, the public debt, excluding
loans for public works incurred during the period of 1883-92 was 16 million
pounds, the interest charges were an addition to both the internal and external
drain. During the last three decades of the nineteenth century, there was a
substantial addition to loans for railways, for irrigation works. On guaranteed
railways, Dadabhai’s comment was highly credible: “I am morally certain that
there has been great waste in the construction of the guaranteed railways”.
Since the remunerative character of many projects was set aside out of
administrative or political considerations, the ultimate burden of ‘extra
ordinary’ works fell on the taxpayer. Dadabhai condemned the principle of meeting
the net charges out of ordinary, general revenues as an inequitable financial
principle. He mentioned three evil consequences of such a system:
-
Uncertainty, delay and the consequent waste in
the works themselves.
-
The intolerable pressure of taxation upon the
people and their dissatisfaction
-
The withdrawal of so much capital which was so
dear for the ordinary wants of the production and the commerce of the country.
Consequences of the Drain
It is impossible to accurately measure the amount of drain which
in the form of resources, raw materials and gold bullion flowed from India into
England during the long British ruler over India. It was calculated that one-fourth
of all revenue derived in India came to be annually remitted to England as Home
Charges. According to Dadabhai Naoroji between 1814 and 1865 about 350 million
pounds went to England by way of drain. He calculated this figure from Indian export
surplus over her imports those years.
The vast amount of resources and capital which flowed from
India into England naturally enabled the people of England to live a better
standard of life. The drain also made possible rising investments in English agriculture
and industry after 1750. These investments were partly responsible for
agricultural revolution in England in the eighteenth century and as also
industrial revolution which commenced after 1750. Rich officials and merchants
who retired in England with huge amounts and pensions after serving in India
had the leisure and money to devote their attention to new inventions, construction
of roads, canals and railways and bring rapid changes in all sectors of
economy. The drain provided the foundation of English economic prosperity.
On the other hand the effects of the drain on Indian
economy and on its people were disastrous. The loot and plunder and the enormous
profits which were take out of India year after year meant a continual drain of
Indian resources and a dead loss. These resources and gold which could have
been available for investment in India were siphoned off to England.
The public debt policy of the government and payment of
annual interest on them meant increasing tax burden on Indian people. Highly regressive
taxation was imposed on people for servicing the government of India’s debt
raised in England.
Another result of far reaching significance was that when the
government of the country spends the tax proceeds withing the country, money
circulates among the people creating demand for various types of goods and
services and thus leads to a profitable progress in trade, agriculture and industry.
The benefits of such a policy reaches down to the mass of people, but when tax
proceeds are sent abroad as it happened in the case of the drain, it meant
sending off the resources out of India, thus impoverishing her trade, agriculture
and industries. The drain was thus responsible for the stagnant economy of
India during the eighteenth and nineteenth century.
Dadabhai Naoroji was of the opinion that the drain was the
principle and sole cause of India’s poverty. He pointed out that the drain
represented not only the sending aboard of certain portion of national income
but also the further loss of employment and income that could have been generated
in the country, if the drain would have been spent internally.
The nationalist leaders also saw drain as a loss of capital
rather than loss of wealth. They were aware that the drain was harmful chiefly
because it resulted in the depletion of productive capital. The drain resulted in
industrial retardation as it produced shortage of capital. The nationalist
leaders, thus, tried to analyze and show the effects of the drain on income and
wealth, on capital, on industrial development, on land revenue, on the terms of
trade and on the poverty of the Indian people. Through the drain theory, the nationalist
writers, specially Dadabhai Naoroji effectively brought out the highly
exploitative nature of British rule in India.
The nationalist leaders pointed out several measures of
reducing the burden of the drain. The most important measure suggested by them
was the Indianization of civil and military services, and reducing the personnel from
England to a reasonable proportion. Another measure suggested was the reduction
of the Home charges. It was suggested that England should shoulder a large part
of the Home Charges. The Home Charges could be reduced by reducing the burden of
interest and capital payments in India’s public debt held in England. The burden
of the drain could also be reduced by purchasing government stores in India
itself, as also by checking the increasing import of private foreign capital.
Dadabhai Naoroji, the Grand Old Man of India, the great
sentinel of India’s freedom who battled untiringly in the cause of the submerged
masses of India, had seen the face of poverty. In his the ‘other India’ the
India of voiceless, poverty stricken, millions had found an untiring friend and
crusader who fought their battels with an obsession that was the despair of his
opponents. He was an intellectual who believed in the power of the written and
the spoken work, in the triumph of truth and justice in the ethical conscience
of the British ruler and his sense of fair play.
Gopal Krishna Gokhale described his personality in one
sentence: “ If ever there was the divine in man, it was in Dadabhai”.
QUESTIONS:
Make a critical assessment of the Drain Theory. In what way
did it contribute to the growth of Indian nationalism?
Evaluate Dadabhai Nawroji’s Drain Theory and assess the
economic and political effects of the drain.
Short note on Drain Theory
Describe in brief the work of Dadabhai Naoroji in the
promotion of economic nationalism
Trace the genesis of the Drain Theory formulated by
Dadabhai Naoroji. What were its politico-economic implications?
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