Drain Dadabhai Naoroji Ganguli Economic Nationalism India British Colonialism

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DOI: 10.1177/001946466400200201

1964 2: 85Indian Economic Social History ReviewB.N. Ganguli

Dadabhai Naoroji and the Mechanism of 'External Drain'

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The Indian Econoinic and SocialHistory ReviewVol. II No.2 April 1965

DADABHAI NAOROJIAND THE MECHANISM

OF EXTERNAL DRAIN*

B. N. GANGULI

THE name of Dadabhai Naoroji has been associated in the minds of

Indians students of economics with the controversial Drain Theory :Dadabhai spoke and wrote of the &dquo;material and moral drain&dquo;, &dquo;of the

deprivationof resources&dquo;, of the &dquo;bleeding drain&dquo;. The drain theory

comprehends the essence of what he wanted to say as a patriotic citizenwho had studied the causes of poverty in a colonial economy. From the

angle of methodology this theory provides an excellent conceptual frame-

work within which Dadabhais economic ideas and his assessment of the

burning questions of his times easily fall into place to form a coherentwhole so as to appeal to even a sophisticated student of modern econo-mics.

Dadabhai and his predecessors conceived of economic drain as anexternal-cum-internal drain. It was a kind of built-in mechanism which

extorted resources out of a low-level colonial economy ; and the surplusthus 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 kindof way. The functioning of this mechanism of transfer of resources

was uniquely determined, according to Dadabhai, by a number of objective

political factors such as the following :-

(1) India being a colonial economy governed by remote control ;

(2) India being quite unlike whitcmens colonies in the temperatezone which attracted labour as well as capital for economic

development ; _ -~.

~_

-

..

* The paper is based on the first of a series of 4 lectures delivered by the author

at the University of Bombay, to be shortly published by theAsia Publishes.

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(3) India being saddled with an expensive civil administration andan equally expensive army of occupation ;

(4) India being a strategic base of operations that had to bear theburden of empire-building not only in India but also beyondher borders ;1

(5) overheads of development being oriented towards strategicrequirements, towards the requirements of administrative con-trol in -a Vast country ruled by a handful of foreigners towardsthe objective of opening up the country to free trade-an

&dquo;

euphemism for colonial exploitation -and towards the objectiveof creating highly paid jobs for foreign personnel ;

(6) India being a colony with a difference, public expenditure outof the proceeds of taxation and loans failed to generate as muchof domestic employment and income as would have been

possible if the principal income-earners had not been birds of

passage, or if they had spent their incomes largely within the

countryor on

goodsand services

producedwithin the

country.

II .

The concept of economic drain in the Indian context has an old lineagegoring back to the age of mercantilism that witnessed the early career of theBritish East India Company. Thomas Mun, the author of Englands Treasure

by Foreign Trade (1664), was a director of the East India Company, themain business of which was the importation of luxury goods in exchangefor silver from the east, particularly India. SirJosiah Child (1630-1699) wasGovernor. of the same company. Both were mercantilist writers. Munsaid : &dquo;that part of our stock which is not returned to us in wares must

necessarily be brought home in treasure&dquo;. According to Sir Josiah Child,&dquo;if the Exports exceed the Imports, it is concluded the Nation gets treasure

by the general course of its Trade, it being supposed that the overplus isimported in bullion and so adds to the Treasure of the Kingdom: Goldand Silver being taken for the measure and standard of Riches.&dquo; (A New

Discourse of Trade, p. 153). Thus the drain of gold and silver from acountry was considered unfavourable, while the opposite kind of drainfa,~ourable. One reason why Mun wrote on the subject of trade was to

1. During the period of Governor-Generalship of Lord Wellesley, who followeda militant external policy, Indian debt increased by 20 million, although he hadreceived at least 1 million annually from the Directors of the East India Companyfor the ostensible purpose of reducing the Indian debt. Between 1822 and 1828 The

Companys Indian debt had increased from 29,388,000 to nearly 40,000,0C0 as the

result of the Burmese War.

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defend the activities of his own East India Company. Here was a,tradingcompany that was importing luxuries, contrary to the tenets of merman-

tilism, and was also exporting silver to pay for them, another apparentinfringement of the principle he himself had enunciated. Mun showedthat both these economic activities, though apparently offensive were, inthe long run, for the good of the State. Drain of silver to the east wasjustifiable, because in due course more silver came back in exchange. Luxu-.ries imported from the east could be sold in Europe at a profit and boughtmore in silver than was drained away in the first instance. If luxury im-

ports by the East India Company were stopped, foreigners would supply,the demand at a higher cost. Did not the Company also maintain ship-ping which could be useful in the event of a War ? Mun showed (Dis-,course of Trade from England unto East India) that 840,376 sent to the,Indies brought 4 milliQn or about five times the initial investment. The,value of his companys joint property was 400,000. Thus trade involved10,000 tons of shipping, 2,500 seamen, 500 ship carpenters and 120 fac-tories in India. While Mun believed in the drain of specie through foreigq.trade he also admitted that too much of it would raise prices and, therefore,

suggested the expedient of foreign lending-a policy recommendation very.much in advance of contemporary thinking on international economics.

It is well known that the crude concept of drain of gold and silver

through the process of foreign trade gradually yielded place to a moresensible view of the purpose of foreign trade and of the balance of pay-ments including capital and service items. We find a faint glimmering ofthe awareness of this in Muns defence of the operations of the East India

Company.It must have become

eventuallyclear to

practicaltraders that

an export of bullion could co-exist with a favourablebalance of trade and

an import of bullion with an unfavourable balance if one were to reckonwith the complex, offsetting factors operating on the various elements inthe balance of payments.

The crude mercantilist concept of drain, however, died hard. Ionthe Indian context Muns reasoning in favour of export of silver to the eastseems to have lost its force almost a century later in the e~,r)~y days of East-

India Companys rule in India, as evidenced by the testimony of some onlythe early British administrators. However, the basic economic situation i1BIndia had been radically transformed after 1757.A trading company had.,by a curious combination of circumstances, become a sovereign ruler. Theprofit-making through trade became integrated with administration whichalso became an instrument of profit-making. A trading company couldnot conceivably function otherwise . Abstraction of a surplus on both trade

2. AsAdam Smith said later, a trader was a bad sovereign. He had in mind theEast India Company.



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and administration-profit-making par excellence-assumed proportion

which were beyond the dreams of even the most avaricious merchantadventurers. The surplus had not only to be mopped up but had also tobe transferred to England. There was thus an. unprecedented economic drainsometimes in devious ways, which drew the righteous indignation of some ofthe early British administrators. Such a situation was quite different fromwhat confronted Thomas Mun and Sir Josiah Child in the 17th centurywhen the East India Company was obliged to export silver to India, and thebulk of East India Companys exports of goods and bullion (three-quarters,

for example, during 1624-29) were disposed of on Indian soil. (Bal Krishna,Commercial Relations between India and England, page 63). The reversemovement of treasure after Plassey was an unprecedented phenomenonthat set a new pattern of external drain-a pattern which had attracted the

attention of Dadabhais predecessors whom he quoted in defence of the drain

theory. This pattern was distinctive in at least two ways. First, it was a

long-period trend, characteristic of the entire period of the British rule till theoutbreak of the Second World War. Secondly, the drain eventually ceased

to take the form of transfer of specie, the most general form of purchasingpower that could be used for waging continual warfare in the earlier

centuries. It increasingly took the form of transfer of commodities throughan export surplus which was liquidated not necessarily in the form of exportof gold and silver from India. The transfer mechanism acquired a complexcharacter that could no longer be explained in terms of crude mercantilist

concepts. The so-called unfavourable balance of Englands trade with the

East, particularly India, was really accounted for by unilateral transfer of

funds. We have evidence that this was clearly understood towards the endof the 18th century. Thus we come across the following statement in the

Import and Export Report for the year 1790 : &dquo;the great Excess of the

: Imports over the Exports in the East India trade, appears as a Balance.

against us, but this Excess consisting of the produce of the CompanysTerritorial Revenues, and of remittances of the Fortunes acquired by Indi-

viduals, instead of being unfavourable is an acquisition of so much

additional wealth to our Public Stock&dquo;. We may also recall in this connec-

tion how Dundas,a

persistent opponentof the East India

Company,became

convinced by the end of the 18th century that he must reconcile himself to

the fact that the surplus revenues of British India could only be realized

through the medium of trade and that it was the East India Company which

could provide a sure mode of remittance.33

.

_ _

Dadabhais version of the theory of economic drain was as sophisti-cated as one would expect it to be in the climate of maturer economic

thinking in the mid-nineteenth century. He, however, quoted British

3. C.H. Phillips, The East IndlaCompany, 1754-1834, p. 71



6/19

89

administrators of a much earlier period in support of the drain theory. Letme briefly summarise a few typical strands of earlier thought to indicatewhether there was a continuity of rational thinking on the subject of

drain, which Dadabhai could justifiably make his own while presenting hisown more refined version of the drain theory.

Let us take Sir John Shores testimony in his famous minute to theFifth Report (1787). Sir John had said : &dquo;the company are merchants aswell as sovereigns of the country. In the former capacity they engross its

trade, whilst in the latter they appropriate the revenues. The remittancesto Europe of revenues are made in the commodities of the country, which

are purchased by them Speaking of the earlier character of Indias

foreign trade, he said that European trading companies who traded withthe Persian Gulf and the Far East used to bring in return goods as well as

silver and gold. &dquo;From the year 1765 the reverse has taken place. The

companys trade produces no equivalent returns, specie is rarely imported bythe foreign companies&dquo;. Thus Indias internal trade, even if it were to ex-

pand, was not expected to bring an equivalence of imports. Sir John Shore

thought that this was &dquo;an evil inseparable from a European government&dquo;.The surplus of revenue over expenditure was spent on the purchase of

domestic manufactures which were exported to &dquo;remit to England the sur-plus&dquo;(italics in quotations are mine).

There is next the evidence of Lord Cornwallis, who, in his minute

of 1790, had specifically referred to the &dquo;heavy drain of wealth.&dquo; Thecauses of the external drain, according to him were (1) large annual invest-ment in Europe; and (2) remittances of private fortunes for many yearspast, the impact of which was severely felt, at the time of writing, in theform of

scarcityof

speciefor current transactions and the

consequentdepression in Indias agriculture and internal trade.5 But like Dundas,Lord Cornwallis was convinced of the prudence of maintaining the EastIndia Company as a political as well as a commercial body, the fundamen-tal reason being the mixed character of this organization which guaranteedremittance of funds from India.

4. Sir John Shore thus confirmed Dundas appreciation of the situation referred to

above.

5. It is interesting to note that in Bengal to relieve the monetary stringency theGovernor-General hit upon an interesting device which led to shipment of contraband

opium to China in 1782. He borrowed Rs. 10 lakhs and gave the lenders certificatesfor the equivalent in Chinese dollars which were to be exchanged at Canton for bills onLondon at the rate of 5s 6d for 365 days bills. To provide cover for this transaction, hewithdrew opium from the Calcutta sales and shipped it on the companys account.

(H.B. Morse, The East India Company Trading to China. Vol. II p. 76). This illus-trates how China trade became part of the companys financial operations in the 19th

century.



7/19

90

Coming down to later times, Dadabhai quoted the testimony of Mr.

Frederick John Shore, a Bengal civilian in 1837 who said : &dquo;the halcyon

days of India are over; she has been drained of a large proportion of the

wealth she once possessed.&dquo; Similarly, Mr. Saville Marriot, a Commissionerof revenue in Deccan, said in 1857 : &dquo;Most of the evils of our rule in India

arise directly from, or may be traced to, the heavy tribute which the country

pays to England&dquo; (italics mine). Marriot quoted a Chairman of the Court

of Proprietors who had said : &dquo;India paid to the mother-country, in the

shape of home charges, what must be considered the annual tribute of 3million and daily poured into the lap of the mother-country a continualstream of wealth in the shape of private fortunes.&dquo;6

It may be noted that these early British commentators used certain

significant concepts, such as (1) &dquo;trade with no equivalent returns&dquo; ; (2)&dquo;drain of wealth&dquo; ; (3) &dquo;remittance of surplus&dquo; ; and (4) &dquo;annual tribute.&dquo;These concepts formed the core of the theory of the mechanism of external

economic drain, which Dadabhai eventually formulated with the help ofelaborate statistics in order to indicate the order of magnitude of the various

factors involved. It is quite evident that in the 18th century the drain theoryhad outgrown the strait-jacket of mercantilist narrowness because of the

change in the objective conditions. The writers whom I have just quotedwere dealing with the phenomena of trade between the mother-countryandthe colony, of trade between unequal partners characterised by inequalityof advantage, disparity of bargaining power and an economic relationshipresting on the exploitation of a dependent colony by a strong, metropolitanpower.

III

Dadabhais fortewas

his capacity for statistical estimation on thebasis of whatever statistics he could lay his hands on, imperfect and in-

complete as they were in his days. He had an amazing sense of statistical

magnitudes and also a fine sense of the possible margin of error for whichhe always made an ample allowance. He was anxious to under-estimate,rather than over-estimate, in order to prove his point. The method of esti-mation he adopted is more important than the estimate itself, because itthrows light on his conception of external economic drain and its distinc-tive character.

6. It is interesting to note that Dadabhai drew a parallel between the drain of wealthfrom India to England and a similar drain from England (with similar effects) duringthe age of the crusades. He quoted Draper, author of Intellectual Development of Europe,who said: "through the cperation of the crusades all Europe was tributary to the Pope...England had for long been a chief pecuniary tributary to Italy, the source from whichlarge revenues have been drawn, fruitful field in which herds of Italian ecclesiastics hadbeen pastured." At the beginning of the 16th century England was thus left materiallyand morally backward.



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91

From the Parliamentary Returns of IndianAccounts he compiled twoseries : (1) annual charges in India and (2) annual charges in England.Charges in India represented public expenditure. He assumed that one-tenth of Indian charges from 1787-88 to 1828-29, the early period of the

expansion of the British empire in India, represented a number of items,in respect of which an element of drain was supposed to be involved. The

proportion was assumed as one-eighth for the subsequent period. Theseitems were as follows : (1) remittances to England by European employeesfor the support of their families and for the education of their children;(2) remittances of savings; (3) remittances for the purchase of British goodsfor their own consumption ; (4) purchases by them in India of goods ofBritish manufacture; (5) purchases by government of stores of British manu-

facture in India and England not included in the Home charges. Chargesin England&dquo; includes interest on public debt held in India and loss in ex-

change, and excluded interest on railway debt and debt incurred for

productive works. &dquo;Home charges&dquo; did not figure during the period1787-88 to 1828-29. Dadabhai made a rough estimate of the wealth trans-

ferred prior to 1788. Wealth transferred during the entire period was thustaken to be equivalent to one-eighthjone-tenth of &dquo;charges in India&dquo; plus&dquo;charges in England&dquo; plus an estimate of transfer prior to 1788, the

aggregate being capitalised at 5 per cent to yield a final figure (includingbooty and other invisible elements) of not less than 1500 million. -

Dadabhai checked this estimate with the help of trade returns avail-

able for the period of about 50 years-1814 to 1865-taking into account

exports, imports and bullion movements. His calculations gave a figure ofan export surplus of 350 million, after making allowance for the grossundervaluation of imports into England and over-valuation of exports to

India under the currentsystem

of &dquo;o~cialvaluation&dquo;, according

to

Dadabhai, and also after making allowance for exports of bullion from

England to India between 1843 and 1865. This figure capitalised at 5 percent, gave a figure of 1000 million to which had to be added the transfer

of wealth similarly capitalised for the period prior to 1814. The final figurefrom the angle of trade returns was thus again in the neighbourhood of

1500 million. -

What is interesting is not so much the estimate of 1500 million asthe fact that Dadabhai was perceptive enough to view Indias export sur-

plus-a recurrent and regular feature of her foreign trade-as a symptomof structural imbalance that had to be understood in terms of merchandise

exports and imports, including bullion movements, taken in conjunction with

tlae unilateral transfer of funds affecting national income and expenditurein India and England respectively. This is not far from the modern pers-

pective of balance of payments analysis. Let X stand for Exports including



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92

services such as insurance, shipping, etc., M for imports (similarly defined);D for income from foreign investment; T for unilateral transfer of the typeDadabhai took into account, which he compendiously called a &dquo;Tribute&dquo;

paid by a dependent economy; E for national expenditure; Y for nationalincome; C for domestic consumption and I for domestic investment. It is

easy to see that in the case of the country receiving the transfer (Englandin relation to India) Y==C+I+(X&horbar;M). National income (Y) would

exceed domestic production (P) by an amount equal to (D -+- T) receivedfrom abroad [Y=P+(D+T)]. Since (D+T) is received in the form of

imports, E (national expenditure) = P (current prod uction)-X + M, whereM includes (D-E-T).

Let us look at the situation from the point of view of a dcpendentcolonial economy which makes the unilateral transfer. Y (national income)=C~-I-f-(X-M)-f-(D-i-T). D = O, since the country does not, by the verynature of the case, export capital abroad for investment. Thus we get the

identity : Y-T=(C+I)+(X-M). T has to be transferred through themedium of (X-M) or the export surplus. Any increase in T means a

corresponding deduction from Y (national income) but a corresponding

increase in (X-M)or

the export surplus. To maintain equilibrium it is(C+I) i.e., domestic consumption plus investment, which has to be corres-

pondinglysqueezed..

In his life-time Dadabhai had to answer critics who had taken excep-tion to his characterisation of items included in T as media of the drain of

wealth. I have already mentioned these items. Broadly, could it not besaid that Indias export surplus represented payment for all kinds ofinvisible services rendered

bythe British rulers,

investors,bankers and

shippers ? Evidently, Dadabhai included in the category of drain Home

charges and the remittances of various kinds which I have already mention-

ed. In justification he quoted Sir George Wingate who had describedthese payments as &dquo;Tribute.&dquo; He also referred to another striking descrip-tion by another Englishman, viz. that they were the &dquo;Salary of England&dquo;for ruling over India. We may, however, go a little more deeply into this

question, because Dadabhai did not rest content only with apt quotations.It is clear that Dadabhai had in mind the category of non-commercial

exports, i.e., exports which did not bring in any commercial return in theform of imports. He was, however, well aware of the fact that the balanceof payments did contain an element which could not be described as a

tribute viz., the remittance of interest on loans for railways, irrigationworks and other productive purposes. He said : &dquo;I must not be misunder-stood. I consider these loans as one of those things for which India isunder special obligation to England. I do not allude to this item in any spiritof complaint... only mean that the interest, even supposing it to be all



10/19

93

earned by the railways, though forming part of the exports of India, is not

part of the commerce of India.&dquo; This clarification, however, was not neces-

sary in the case of interest on unproductive debt incurred for empire-buildingin India

and outsidethe

bordersof

India,in the name of Indias defence.

The place of what are known as services in the balance of accounts

of a country is a theoretical matter which cannot be easily settled. Therewas a tendency, in the last century and even comparatively recently, to

oversimplify the problem by thinking of invisible services as a componentof the balance of payments, so that the drain, if any, could be conceived

only in terms of bullion movements. This was a vestigial remnant ofmercantilism which has somehow shown a high survival value. It may be

worthwhile to recall in this context what Edwin Cannan said in his Wealthhalf a century back (Wealth was published about three years before

Dadabhais death). Cannan mentioned five non-merchandise items in thebalance of payments : (1) cost of carriage of exports and imports; (2) pay-ment fcr services &dquo;performed for people living in one country by personswho have their home in another country and wish their earnings to be

remitted home. This leads to exports from the first country without any

corresponding import from the second country to the first.&dquo; Cannan speci-

fically illustrated this by referring to Englishmen serving in India either ingovernment or in other undertakings; (3) transfer of interest, dividends orrent on property held abroad; (4) earnings of foreign investment; and (5)&dquo;various payments of a non-commercial character made by people livingin one country to people living in another.&dquo; Cannan mentioned in thisconnection reparations and political tribute. With reference to these fiveitems in the balance of payments, Cannan observed (Weal tlr, p. 242 foot-

note) : &dquo;Some time ago it was usual to endeavour to prove that an excess

of imports of goods&dquo; (in the case of England, for instance) &dquo;did not neces-sarily mean an exportation of bullion by alleging that the excess wasbalanced by theinvisible exports. This was a clumsy and confusing wayof treating the matter. It is tolerable in regard to the first two items&dquo;

(cost of carriage and remittances of foreigners serving abroad). &dquo;Sinceservices can be conceived as invisible exports but it fails entirely in regardto the other tlaree factors&dquo; (italics mine). The idea of treating the servicesrendered by the Englishmen in India as an invisible export, for which there

was legitimate payment, was not even tolerable to Dadabhai, although it wastolerable to Cannan. For one thing, Dadabhai held that the high salariesreceived by Englishmen in India was not commensurable with the servicesrendered. For another thing, since Indians were not associated with the

public services, the railways and other undertakings in responsible positionsthe Englishmen did not leave behind a fund of experience and knowledge,which was drained away, while the country bore the heavy burden of

sterling pensions. As regards the other three items,--transfer of interest,



11/19

94

dividend and rent transfer of investment income and transfer of non-com-

mercial payments,-Cannan categorically said that the concept of &dquo;invisible

exports, as in the case of England in relation to India, &dquo;fails entirely&dquo;.

Dadabhais conception of external economic drain had an interestingdimension which has to be seriously considered in this connection. Thedrain theory had its crude exponents in his time. Keeping money or pur-chasing 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 our country. But there was something behind this

evidently fallacious mercantilist formulation, which was nevertheless sub-

stantial. Dadabhai grasped the underlying economic reality firmly enough.

He applied the criterion of the effect of public expenditure on the generationof income and employment within the country. Exportation and importa-tion if they are a foreign monopoly, yield profits which do not generatedomestic income and employment, but generate incomes and employmentabroad. Here is a foreign leakage, to use a modern expression, or a drainas Dadabhai understood it. The common man in India wanted to express

the same idea but failed to formulate it correctly. Consider, again, the

Englishman who imported British goods for his personal consumption or

bought British goods in India, or the government which bought, in India orin England, stores of British manufacture. In these cases individual aswell as public consumption failed to generate domestic income and employ-ment. There was no offset, in the shape of the expansionary effect of publicexpenditure on local employment and income, for the heavy taxation borne

by the poverty-stricken masses, which made extravagant public expenditurepossible. Here again there was a &dquo;foreign leakage&dquo; of employment and

income which was virtually a drain.

IV

Dadabhai endeavoured to prove that the colonial economic drain had

a distinctive character in the case of India as compared with colonies that

had been developing as whitemens settlements in the temperate region.This comparison gave a historical perspective to his drain theory.Dadabhai had noted what economic historians have done in the present

century, viz.,that the whitemens colonies had a sizable

import surplusin

relation to the capital-exporting mother-country. He said : &dquo;the importsofAustralia, including bullion, etc. during 1858-67 are 309 million and

exports .268 million, leading to an excess of imports over exports of about

41 million. The imports of Canada (including bullion) are 148 millionand exports 120 million, leaving an excess of imports of 28 million&dquo;.This import surplus was caused by heavy imports of capital for colonial

economic development which generated employment and income in the



12/19

95

colonies. Dadabhai estimated that during the same period Indias &dquo;total

exports (including treasure) are 456 million and the imports (includingtreasure) only 419 million&dquo;. The import value included 72 million of

railway loan and other forms of public debt which were not productive.&dquo;Were it not for this railway loan, which to some extent modified the effect

of the political remittances, in what a sad condition would India have been

now .......... Indias exports, say, are about 50 million a year at

present. Now, can this sum earn enough of profit to pay 10 million a

year of the political remittance and leave something to be added to its

capital?&dquo; Dadabhai was also careful enough to point out that &dquo;the opiumrevenue which is paid by China makes up some 7 million for the politi-cal drain, and the rest must be withdrawn from the production every year,reducing the productive capital so much.&dquo; He demonstrated that capitaldevelopment in other parts of the British Empire (excluding the tropicalcolonies) was reflected in a high value of per capital exports, whereas forIndia per capita exports were insignificant in value and reflected the reverseof domestic capital formation. He had no information about the foreignindebtedness of British colonies other than India, the servicing of whichcould be deducted from the total value of exports in order to compute what

he called &dquo;true export trade per head&dquo;. He assumed as if their entirepublic debt was so much foreign debt and that the rate of interest was 5 percent. Making a deduction on account of interest payment on this basis,Dadabhai arrived at the following figures of &dquo;true export trade per headof population&dquo; for the year 1885 : ..

Dadabhai concentrated his attention on the basic difference between

India and other British colonies, i~i~., that, in the one case, foreign tradewas oriented towards

capital development,while in the other the reverse of

it was true, except in so far as railway loans and irrigation loans were a. mitigating factor. Thus he said : &dquo;It is the exhaustion caused by the drain

that disables us from building our railroads, etc. from our own means. If wedid not suffer the exhaustion we do, and even if we found it to our benefitto borrow from England, the case would be one of a healthy naturalbusiness, and the interest then remitted would have nothing to be deploredin it, as in the case of other countries, which, being young, or with un-

developed resources and without much means of their own, borrow froin



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others and increase their own wealth thereby, as Australia, Canada, theUnited States, or any other native-ruled country that .so borrows.&dquo; (italicsmine)

He thus came to the conclusion that the inflow of foreign capitalin the Indian context was caught in a vicious circle and was prevented fromplaying a constructive role which it was expected to do in a healthy stateof the economy. In a mood of anguish and desperation which was foreignto his temperament, he said : &dquo;British Indias own wealth is carried out of

it, and then that wealth is brought back to it in the shape of loans, and forthese loans she must find so much more for interest; the whole thing

moving in a most vicious and provoking circle. Will nothing but a catas-trophe cure this ?&dquo; -

Although Dadabhai regarded railway development with borrowed

capital as a mitigating factor, he thought that it did not produce the same

consequences in India as it did, for example, in U.S.A. He recognised that

railways &dquo;help in increasing the production of the country&dquo;, because &dquo;theydistribute the produce of the country from parts where it is produced or

is in abundance to the parts where it is wanted.&dquo; But &dquo;every country in

building railways, even by borrowed capital, derives the benefit of a large

part of such borrowed capital ......... Excepting interest paid for such

borrowed capital to the foreign lending country, the rest of the whole in-come remains in the country.......... In the United States every cent

of the income of the railways (excepting the interest on the foreign loan) isthe income of the people of the country, is a direct maintenance for the

people employed on it and an indirect property of the whole country ......... In India the case is quite different. First, for the Directors homeestablishments, government superintendence and what not in England, a

portion of the income must go from India; then a large European staff of

employees (excepting only for inferior and lowest places) must eat up and

take away another large portion of the income.&dquo; Dadabhai thus came to

the conclusion that &dquo;the really important question in relation to publicworks is not how to stop them, but how to let the people of the countryhave their full benefits.&dquo;

7. There is no doubt that under the guarantee system (assurance of a minimum of

5 per cent interest on private railway lines) the government assumed the risk without the

chance of making profit, while the private railway companies had no incentive for

economy and secured the profits. By the turn of the century the government railways

began to make profits and contribute to revenues, although they had the disadvantage of

a top-heavy administration which was far from being Indianised. One has also to

reckon with (1) the burden of over capitalisation ; (2) the burden of uneconomic

strategic lines and (3) a freight structure that inhibited sound economic growth.



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97

Dadabhais observations on the role and character of foreign capitalin relation to foreign trade in the case of Englands tropical colonies, suchas India, as compared with whitemens settlements in other parts of theBritish Empire, have been amply confirmed by the results of recentresearch.8 During the period 1863-1913, Great Britain had investedabout 4 per cent of her national income overseas, the percentage being as

high as 7 during the latter part of the period 1905-1913. Roughly two-thirds went to the whitemens settlements, Canada, U. S.A.,Argentina,

Australia, together with a great migration of about 60 million people in-

cluding many with acquired skill and training as well as enterprise.Investment was thus of the type of direct investment in the generaleconomic development in these newly settled areas. According to RagnarNurkse, the colonial pattern of foreign investment, i.e., concentration ofinvestment on extractive industries producing raw materials for export toadvanced countries, in general, and to the mother-country, in particular,played a minor role. Thus three-fourths of British foreign investmentswere accounted for by public investments or public utility investments, andthe rest by banking, insurance, manufacturing and raw-material extraction.For Great Britain capital outflow secured a widening of capital, in theabsence of its deepening in her own economy. But there is no doubtthat capital development in these areas, through the construction ofeconomic overheads, stimulated the development of primary productionunder favourable natural conditions and also the export trade in primarycommodities. Whether this was colonial economic development is amatter of semantics, a question of definition. The situation was, as JohnH. Williams has characterised it, that &dquo;England had found it convenientto produce wheat and meat (and for that purpose to export capital) in

Argentina, gold and wood in Australia, minerals and food products in

Africa, raw materials and food in U. S. and Canada through the greaterpart of their history&dquo;.9

. The tropical colonies of England, including India, received onlyone-third of the total capital overflow. Nurkse says that this part ofBritish capital &dquo;was employed in a different type of area where its achieve-ments were much more dubious : tropical or subtropical regions thatformed a minor field for overseas investment before 1914 and are a major

problem today: the truly backward economies&dquo;. (Italics mine).Nineteenth century British investment centred on railways. The Indian

8. I am indebted to Ragnar Nurkses article entitled "International Investment

today in the Light of Nineteenth-Century Experience"(Economic Journal, December,1954) for his excellent summary of the results of modern research on this subject.

9. John H. Williams The Theory of International Trade Re-considered EconomicJournal, June, 1929, p. 208.



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98

railways accounted for one-tenth of the total British railway securities in1914. British railway investment was protected by a system of extensive

government assistance in the form of land grants, subsidies and guaranteed

returns to the investors. Nurkse, however, does not mention other advan-tages flowing from British investment in Indian railways, of which Dada-bhai tried to give a balance-sheet. Nevertheless, he quotes with approvalthe findings of L. H. Jenks (British Experience with Foreign Investmentin Journal of Economic History, 1944, Supplement) that in the case of

India, &dquo;the railway did not give rise to a flood of satellite innovations10and destroyed more employment opportunities than it opened up&dquo;. It isnow generally recognized that the colonial pattern of investment inextractive industries tended to

promote lopsidedrather than &dquo;balanced&dquo;

growth. Apart from this aspect of the question, the early history of

plantation industries and mining in India had an unsavoury characterwhich has passed into legend. In respect of capitalistic enterprise in theseindustries what a character in Bernard Shaws play,Apple Cart, said, per-haps too sweepingly, about British overseas investment in general, is trueto life : &dquo;England sends her capital abroad to places where poverty and

hardship still exist : in other words where labour is cheap. We live incomfort on the

imported profitsof that

capital&dquo;.If Dadabhai had been

alive whenApple Cart was written this statement would have been grist to

his mill. He had estimated that in 1885, for example, the exports of

British planters in India were 10,000,000 out of the total exports of

65,300,000 for British India, excluding the exports of Native States and

Frontier territory.

V

It was a paradox to Dadabhais contemporaries that a drain theorycould be sustained in the context of a sizable export surplus which Indiahad in relation to Britain. Dadabhais critics who had not shed their

mercantilist notions thought that an export surplus did promise a profit toIndia and an influx of specie into India was a visible realization of this profit.How could one talk of an outward drain when the drain was inward ? Thus

in the course of his polemics against Dadabhai, Sir Grant Duff referred

to the absorption of gold and silver and to the hoarding of these preciousmetals. Was not India a sink of precious metals ? If India was prosperousas a sink of precious metals before the period of the British rule, how couldshe be otherwise in the face of the inflow of bullion after 1801 ? Dadabhai

was too wary to be lured into a mercantilist. trap, but it would be instruc-

tive to note how he exposed the hollowness of this argument on its own

ground by a masterly array of facts.

10. In this respect Marx also went wrong and proved a false prophet with regard to

the revolutionary effects of railway development in India.



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Dadabhai started off by arguing that &dquo;India has not got its importsof silver as so much profits on its exports or making up so much of deficitof imports against exports.......... The import of bullion has been

chiefly from commercial and financial necessities&dquo;. During the period1801-1863 the net imports of bullion were 234,353,686. From 1864 to 1869the net imports of bullion were 101,123,448. (Dadabhai admitted that thesewere years of windfall profits on the sale of Indian cotton as the result of the

American War. During these years there were also large remittances for

railway loans). What happened to the imported bullion worth about 335 million ? Dadabhai explained that the increasing monetization ofthe rural economy mainly in consequence of the new universal system of

collecting all revenue in cash created a large demand for silver coins.The coinage of India from 1801 to 1869 was about 266 million. Deduc-

ting only 66 million for wastage for the sixty-nine years, there should bein circulation 200 million.......... Striking off 50 million for re-

melting, though at a loss of 2 per cent (the charge for coinage), I takethe coinage as only 150 million. Deducting this amount and the was-

tage of even 50 million, i.e., a total of 200 million, there will remain

for all other social and industrial wants, besides coinage, about 135

million&dquo;, which hardly gave 13s-6d per head of population for the period of69 years, as against 30s per head for a period of 12 years in the case of theUnited Kingdom. Dadabhai concluded : &dquo;to talk of oriental wealth now.as far as British India is concerned, is only a figure of speech, a dream&dquo;,when we talk of all the silver having a purchasing power, we forget how

minutely and widely a large portion of it must be distributed to be of nouse for national purposes&dquo;. The Herschell Committee of 1893 estimatedthat during the twenty-three years from 1870-71 to 1892-93 the net

imports of silver were Rs. 7,184,000 a year, but &dquo;nearly the whole of thenewly imported silver had during these years passed through the mint&dquo;.This finding, although it relates to the subsequent two decades, corro-borated the essence of Dadabhais argument.

This line of analysis led Dadabhai to cast his gaze backward to the

period prior to 1801. He asked the question, &dquo;how much did the EastIndia Company first drain away from India, before it, as a matter of

necessity, began to re-import bullion He quoted the testimony of SirJohn Shore and Lord Cornwallis. During the period of 50 years before

Plassey India had imported through the East India Company goods of thetotal value of 64 million, but English money of the total value of 20 million. After 1757 the situation was transformed. Thus in his

minute of 1787 Sir John Shore said that between 1762 and 1787, and

particularly between 1777 and 1787, there was a large outflow of bullionfrom India. Although remittances to China were normally financed bygovernment by means of bills, a large amount of silver had been remitted.



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100

from India. Sjlver bullion had also been transferred to Europe by indivi-duals in considerable quantities. Sir John had no hesitation in coming tothe conclusion that current silver had greatly diminished in quantity, and

that further depletion was expected for three reasons : (1) &dquo;that the oldchannels of importation by which the drains were formerly replenishedwere in great measure closed&dquo;; (2) that Madras, Bombay and China had tobe supplied with silver money ; and (3) that &dquo;the exportation of it by the

Europeans to England will continue still further to exhaust the country ofits silver&dquo;. Writing at about the same time in 1790, Lord Cornwallis con-firmed Sir John Shores observations. He had noticed the depression(due to a fall of prices as the result of a rise in the price of silver) in

agriculture and internal trade and mentioned the &dquo;heavy drain of wealth&dquo;,&dquo;the remittances of private fortunes&dquo;, &dquo;the diminution of current specie&dquo;and &dquo;supplying wants of other Presidencies&dquo; as the causes of theeconomic debacle. Dadabhai added his own vivid commentary : &dquo;where

can we find an account of the fortunes which Companys servants made,by foul means or fair, in spite of their masters orders, and which theymay have taken over to their country in various ways independently ofthe customs house, with themselves in their boxes ? ......... The East

India Company and their servants carried away via China or direct toEngland-the former the surplus of revenue, the latter their savings andtheir bribes-in specie&dquo;. Here was &dquo;drain&dquo; par excellence on a largescale. This was sufficient to clinch the argument : &dquo;it is after exhaustion

that we have the return of bullion after 1801, which is, after all, only 34s.

per head for all possible wants other than the requirements of coinage ina period of 69 years&dquo;.

The narrative I have

presented bringsout incidentally certain signifi-

cant structural peculiarities of the mechanism of Indias trade and trans-fer of payments. It is necessary to underline them, because, in my

judgment, they are part and parcel of Dadabhais conception of externaleconomic drain.

Dadabhai pointed out that &dquo;the present exports of British Indiaconsist of (1) the exports of produce belonging to the Native States,and (2) the exports of produce belonging to the territories beyond the land

frontiers&dquo;. Out of the total exports of 83,200,000 in 1885, for example,the share of Native States was 16,600,000, whereas the land frontier

export trade accounted for 1,300,000. Re-exports of foreign merchandise,which could not be estimated, also formed part of the total for British

India. The export trade of the Indian States, at least of some of the

important ones, had an interesting peculiarity. These states were politicalenclaves that virtually formed separ4te economic units from the point ofview of their external trade : trade between any of them and British India

was of thenature

of internationaltrade in

the classical sense. Dadabhai



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101

noted that the Indian States &dquo;have no foreign drain except the small

amount of tribute of about 700,000........ These States, therefore,receive back for the exports of their merchandise and for the ordinary trade

profits on such exports, full returns in imports of merchandise andtreasure&dquo;. Since Bombay was a maritime Province and a terminal pointin the routes of commodity movements prior to exportation, this Presidencyhad an excess of imports over exports. In 1884-85, for example, the

excess was Rs. 5,55,46,756 in relation to Rajputana and Central India,Rs. 1,48,91,355 in relation to Berar and Rs. 8,67,688 in relation to Hydera-

bad, or a total of Rs. 7,13,05,796. Rajputanas export surplus was

explained by its export of opium. The export surpluses of the Indian

States were liquidated by the movement of cash and bullion. Some ofthe frontier territories also received more than what they paid out in the

form of political tribute. &dquo;This then is the way the treasure goes,&dquo;Dadabhai said, &dquo;and poor British India gets all the abuse, insult added

to injury&dquo;. It was also his considered opinion that the Indian States were

economically better off, in the absence of the economic drain to whichBritish India was exposed.

The opium trade with China playedan

interesting role in thefunctioning of the mechanism of external economic drain. I quotedDadabhai to say that the East India Company transferred its revenue

surplus, and its corrupt officers their savings and clandestine gains, viaChina. He was moved to righteous indignation when he spoke of Indias

opium trade with China : &dquo;Because India cannot fill up the remorseless

drain, so China must be dragged in to make it up, even though it be bybeing poisoned.......... All the profits of opium go to the same wayof the drain to

England. OnlyIndia shares the curse of the Chinese race

in being the instrument. This opium trade is a sin on Englands head anda curse on India&dquo;.

Leaving aside the ethics of the opium trade, what is of greater interestis its decisive influence on the changing fortunes of the East India Companyand its bearing on the companys remittance operations. At one time the

supply of Indian opium to China was a monopoly and a source of fabulous

profits. Although in 1872 the East India Company had ceased sendingany opium to be sold in China on its own account, as a commercial

organization they were much concerned with the success of their publicsales in Calcutta and as administrators they were impelled by the necessityof encouraging buyers at the Calcutta opium auctions. Gradually theadministration had to calculate not merely the quantity which could be soldat the existing high prices but the prices at which competitive supplies couldbe sold in the China market. By the end of the 19th century Indian opiumhad lost its character of monopoly in the China market and the trade was



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dwindling. The competition was from Persia and from China itself.l1 ThusIndian exports of opium declined from 91,798 chests in 1882-83 to 75,384chests in 1892-93. After the closure of the mints to silver in 1893, in spite of

the fall of exchange, the decline of exports to China was mainly due to theoperation of competition from countries whose currencies had depreciatedequally or to a greater extent. At the time of writing (November, 1880)Dadabhai could not naturally anticipate these trends. I have no doubt,however, that he was on sure ground with regard to the operational

significance of the China trade, in general, and of the opium trade, in

particular, during the earlier half of the 19th century. By 1833, the yearof the famous Charter Act, it had become evident to even the worst

critics of the East India Company that the Company had operated itsChina trade, running at an average rate of more than 1 million perannum, at a profit. Out of this profit was met part of the deficit in therevenues of India, which had averaged ovcr 2,878,000 during the five years

ending in 1828-29. Between 1813 and 1824 the amount paid by the

Companys commerce on behalf of the Indian territories exceeded the remit-tances from India by 1,500,000 (Wilsons History oj India). As Dr. H.B.Morse observed in Vol. III (pp. 337-338) of the East India Cornpany Treading

to China, &dquo;upto, and including, the season 1816 the silver which wouldotherwise have been returned to India (on account of Indias exports of

opium worth 5 million dollars and of cotton and other agricultural produceworth 1 million dollars) was absorbed into the Companys treasury in

exchange for bills on London. The process was assisted by the practice,

developed by theAmerican traders in 1833, of &dquo;taking bills on London fromthe United States to Canton, and selling them there to the traders wishingto make remittances to India&dquo;. Thus Professor C.H. Philips has rightly

concluded that &dquo;the China trade had afforded the company convenientmeans by which to meet the payments incurred in England on account ofthe Indian territories&dquo;. East India Company 1754-1834, page 288). Itwas also a fact that the Company paid its regular dividend out of thesure profits on the China trade. Transfer of Profits on the China trade,was thus curiously dovetailed into the transfer of payments from India

both of a commercial and non-commercial character. But it stands to

reason that to the extent to which the remittance of profits on the Chinatrade oflfset the deficit on Indian remittances on commercial accounts

(transfer of dividend payment) and Territorial accounts (Home charges aswell as other kinds of remittance), the drain as conceived by Dadabhai was

less than what it would have been otherwise. Dadabhai, however, arguedthat &dquo;Indias miseries would have much sooner come to the surface....

But this trade (opium trade) has prolonged the agonies of India&dquo;.

11. Non-Indian opium, inferior in quality but cheaper in price, came to beadulterated with Bengal opium when the price of the latter was too high. Chinese opium

Documents

Drain Dadabhai Naoroji Ganguli Economic Nationalism India British Colonialism