Economic Impact – Drain of Wealth

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Economic Impact

 Drain of Wealth

The “drain of wealth” from India to Britain during the two centuries of colonial rule was very real, very substantial and there are strong reasons to believe that India may have looked significantly different and far better economically and socially had it not been for the two centuries of British rule.

The beginning of this period can probably be traced back to the Battle of Plasssey. The battle marked a significant turning point in world history, for it permitted the English East India Company to gain control over the rich resources of the Mughal successor state in northeastern Bengal and Bihar. This was the starting point for a century-long process of British conquest and dominion over the entire Indian subcontinent and beyond.

While the maximum revenue extracted by the Mughals as high as 40%, this paled in comparison to the effective tax rate in the early years of colonial rule, as central Mughal authority waned, the state resorted increasingly to revenue farming, raising the effective rent share to 50% or more. After initial attempts at revenue farming, Company officials aggressively introduced new taxes in an attempt to reduce their dependence on agrarian production, thus worsening the tax burden on the common man.

Land revenue continued to be the mainstay of the regime until the end of British rule in India, but its share of gross revenues was far less than under the Mughal emperor. To a larger degree, however, new taxes not imposed by the Mughals accounted for land revenue’s declining share. Company officials began early to diversify their tax base so that the new regime was not so overwhelmingly dependent upon agrarian production.

British salaries were high: the Viceroy received £25,000 a year and the governors, £10,000. From 1757 to 1919, India also had to meet administrative expenses in London, first of the East India Company, and then of the India Office, as well as other minor but irritatingly extraneous charges. The cost of British staff was raised by long home leave in the UK, early retirement and lavish amenities in the form of subsidized housing, utilities, rest houses, etc.

Although there is a prevalent myth around British contribution to development if education and infrastructure in India, in reality, the situation was quite different. The bulk of government expenditure was focused more on ensuring the stability of the empire than anything else.

Amidst all the paraphernalia of the “Raj”, public works and social expenditure was completely forgotten. The Company allocated negligible funds for public works, for cultural patronage, for charitable relief, or for any form of education, confining its generosity to paying extremely high salaries to its civil servants and military officers.  Otherwise parsimony ruled.

The education system which developed was a very pale reflection of that in the UK. Three universities were set up in 1857 in Calcutta, Madras and Bombay, but they were merely examining bodies and did no teaching. Drop-out ratios were always very high. They did little to promote analytic capacity or independent thinking and produced a group of graduates with a half-baked knowledge of English, but sufficiently Westernized to be alienated from their own culture. Education was used as a tool to turn a tiny elite into imitation Englishmen and a somewhat bigger group into government clerks.

In spite of agriculture being – by far – the most significant part of the economy, little was done to promote agricultural technology. There was some improvement in seeds, but no extension service, no improvement in livestock and no official encouragement to use fertilizer. Lord Mayo, the Governor General, said in 1870, “I do not know what is precisely meant by ammoniac manure. If it means guano, superphosphate or any other artificial product of that kind, we might as well ask the people of India to manure their ground with champagne”.

The Company officials were extremely wary of any public works spending unless it was for projects of direct use to the state.  The Company even failed to repair and maintain roads, river embankments, and bunded storage tanks for irrigation that had been the responsibility of earlier regimes.  When, in 1823, the Governor General in Council decided to devote a portion of anticipated surplus revenues to works of public improvement, the Court of Directors rejected this proposal. When, the Directors learned of heavy expenditures on buildings in the mid 1820’s, they wrote to the Governor General to condemn this extravagance.

In the early 1800s imports of Indian cotton and silk goods faced duties of 70-80%. British imports faced duties of 2-4%. As a result, British imports of cotton manufactures into India increased by a factor of 50, and Indian exports dropped to one-fourth. A similar trend was noted in silk goods, woollens, iron, pottery, glassware and paper; millions of ruined artisans and craftsmen, spinners, weavers, potters, smelters and smiths were rendered jobless and had to become landless agricultural workers.”

The monopoly on trade in salt and opium was an important mainstay of the Company’s finances. Together opium and salt produced on average 18.9 percent of gross revenues.

A certain Portion of the Revenues of Bengal had been for many Years set apart, to be employed in the Purchase of Goods for Exportation to England, and this is called The Investment. The greatness of this investment had been the standard by which the merit of the Company’s Principal Servants had been generally estimated; and this main cause of the Impoverishment of India has generally been taken as a measure of its wealth and prosperity.

However, the high taxes, the heavy burden of state, the neglect of education and public works and unfair trade practices – these were only the tip of the iceberg. The most damning evidence of British exploitation was the irrefutable “drain of wealth” that took place over the period of two centuries.

Between 1772 and 1815 there was a huge net financial transfer from India to Britain in the form of Indian goods. The “drain resulting from contact with the West was the excess of exports from India for which there was no equivalent import” included “a bewildering variety of cotton goods for re-export.

These net financial transfers from India to Britain reached a peak of £1,014,000 annually in 1784-1792 before declining to £477,000 in 1808-1815.

Separately, Dadabhai Naoroji estimated the economic costs and drain of resources from India to be at least at 12 million per annum. He said that all attention was engrossed in devising new modes of taxation, without any adequate effort to increase the means of the people to pay; and the consequent vexation and oppressiveness of the taxes imposed, imperial and local.

Between 1757 and 1859 officials of the East India Company tapped the productive people and resources of Bengal and the eastern Gangetic valley to fund the protracted military campaigns necessary to conquer India. In 1793, this devious system of extortion was given official sanction and thus was paved the path to financial ruin. The Company was enjoined to take ten million rupees (1 million sterling) each year for the investment from the territorial revenues of colonial India.

This systematic drain was nothing short of loot – albeit carried over 200 years and under the cover of colonial trade. It left the economy in shambles and reduced this great country from one of the powerhouses of the world economy to a laggard which was barely able to sustain itself.


Under pressure from the powerful rising English manufacturing interests, the EIC dealt a severe blow to Indian industries that led to final extinction—the phase of India’s ‘deindustrialization’. It employed the arm of political injustice on Indian products (one-way free trade) to strangulate a competitor with whom she could not contend ‘on equal terms’.

The last nail in the coffin was hammered in 1813 when the trading monopoly of the EIC was withdrawn. It was the political domination and the commercial policy of Britain that threw open India to all. India now suddenly was reduced to an importing country from an exporting nation. Indian market now became flooded with machine-produced goods at a lower price and also witnessed the loss of export markets.

Further tragedy was in store. Being a colonial country, India had to pay a large sum for England’s industrialization scheme. She was forced to supply raw materials for triggering industrial revolution with greater rapidity in England. India was then forcibly transformed from being a country of combined agricultures and manufactures into an agricultural colony of British manufac­turing capitalism.

A history of modern Indian large scale private industry between 1850 and 1914 is associated with the developments in mainly plantations like jute, cotton, and steel. Beginning of these modern Indian industries was the ‘product of India’s economic contact with Britain’. There was also a limited development of mining, especially coal. One thing that is worth noting is that most of these industries, except textile factories, were under European control.

In the early days of the Company rule, Indian raw jute had been in great demand for the Dundee mills.

World conditions after 1850 were quite propitious for the growth of jute manufacturing and the credit for jute spinning firm in Rishra, near Serampore, Bengal, went to George Acland. The founda­tions of cotton textile industry were laid also during the early 1850s. Though the jute industry was dominated by the foreigners the cotton industry was shaped and cared by the natives, mainly the Parsee entrepreneurs.

Some abortive attempts were made by the East India Company in the 19th century to develop iron and steel industry. However, the credit for the development of large scale manufacture of steel in India goes to Jamshedji Tata and his son Dorabji. Tata Iron and Steel Company were set up in 1907 and it started function of producing pig iron in 1911 and steel ingots in 1912. Meanwhile India’s industrial structure started diversifying. In spite of inadequacy of domestic demand and high production costs, industries like woollen mills, breweries, and paper making industries made significant march during this time. Though these industries were recorded officially as the large industries, they were small in character.

Other industries having small-scale character that operated were tanning, vegetable oil processing, glass-making, leather goods manufacturing, etc. Despite diversification, India’s modern manufacturing industry could not develop on a sound footing before the outbreak of the World War I.

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