A series of articles and interviews by the economist Utsa Patnaik has revived an old criticism of British colonial rule in India: the regime drained India of money and made the Indians poor.[1] In turn, the drained wealth funded British industrialization. Indian intellectuals like Dadabhai Naoroji first made a version of the claim at the turn of the twentieth century. Elements of the argument survived in political discourses until the 1970s, and then the idea died.
It died because the claim was partly based on a wrong economic methodology and partly unverifiable. K.N. Chaudhuri, who did path-breaking work on trade history and wrote the chapter on “foreign trade and balance of payments” in the Cambridge Economic History of India (1982) did a careful assessment of the claim in 1968 and rejected it.[2]
Patnaik has revived the debate. Historians should welcome the attempt if it brings new data or methods. Patnaik does neither. Her claim continues to be based on dreadfully bad economics and is still untestable. The three new things she represents are fierce rhetoric, a trusting publisher that did not do adequate refereeing, and an audience ready to believe horror stories about British colonialism without a fact check.[3]
In this essay, I will revisit three key illustrations used in these pieces showing that the British drained India of money. Chronologically the earliest example comes from the late eighteenth-century East India Company government. The Company did not rule India then, but only eastern India. Even that rule was divided between the local Nawab and the Company for a considerable time. Agency for any misdeed was shared – a point usually forgotten.
In this region, roughly between 1765 and 1772, a coterie of officers of the Company had access to the tax resources of Bengal and used it to buy textiles for export, their primary business. The profits, if any, would go to Britain and be wasted money from an Indian point of view. The significance of this “tribute” is exaggerated out of all proportions by the proponents of the drain.
The Company’s acquisition of territorial power coincided with the beginning of the end of its trading career. From the 1770s, most revenues went to fighting wars in India and maintaining civil administration. Political reality derailed business plans. “It is evident,” says Huw Bowen, “that the directors’ immediate post-1765 commercial strategy was underpinned by a belief that a large revenue surplus could be used to prime the pump of Company trade. Yet it soon became clear that Clive and others had exaggerated the size of the revenues.”[4] In the end, less than a fifth of the revenues went to fund trade. And this proportion fell to zero long before 1783, Bowen suggests.
A government running a business enterprise on the side is not unusual. The value of textiles exported is not a drain, since the artisans were paid. Not even the profits on the transaction were a drain. Only the profit repatriated was a drain, if we are willing to believe that the artisans could find other work if not the Company’s custom. These are stringent and unverifiable conditions. Let us say the repatriated profit was five percent of investment. I calculated Bengal’s income in a 2011 Journal of Economic History paper. Those estimates and the numbers just cited suggest that the tax method may have transferred 0.08 percent of Bengal’s income over a ten-year period. That proportion translates to an average annual transfer of about 28,000 pounds when the income of India was nearly 150 million pounds. And it ended in less than a decade. A big deal?
The second illustration is the council bill. This bill and its counterpart formed the standard system for the remittance of money between India and Britain in the colonial era. A British importer of Indian goods paid pounds in London to buy a draft, the money was added to the currency reserve or used for budgeted expenditure in London, and rupees were released in India against this accumulation to the carrier of that draft, the Indian exporter. There was no mystery or fraud in the council bill system. The bill was a remittance instrument like any banker’s draft. It also served as a monetary instrument because the monetary system worked such that the pound sterling was a reserve currency and a trade surplus would see accumulation in reserve and printing or release of rupees out of the reserve.
This simple remittance takes on a sinister face. Jason Hickel claims that the government committed a fraud: “they [the Indian exporters] were ‘paid’ in rupees out of tax revenues – money that had just been collected from them.” The economics implicit in this statement is confused beyond belief. Council bill had nothing, I repeat nothing, to do with taxation. No one can be cheated or left unpaid just by using a banker’s draft.
When the Indian exporter cashed the draft, the money paid out could come from freshly printed notes, reserves, or even taxes. That choice does not signify exploitation, only monetary policy. A lot of the taxes came from income. The cash received against the draft contained the business profits of the exporter, from which taxes would be paid later. Tax payment needed that income to be created first, and income creation by exporting needed the council bill instrument. All this is normal and part of any open economic system. No fraud here. The argument rests on flawed economics and a rhetorical device, joining remittance with taxation with nothing more than menacing language.
The third illustration of drain involves export surplus. Colonial India was an extremely open economy, meaning it was far easier to hire people and borrow from abroad than it is today. The government did this, and so did private businesses and institutions. Ordinarily, British India maintained an export surplus and paid interest on borrowing and salaries of personnel hired abroad with the surplus exchange. The Indian nationalists ignored the value that these services rendered and called the payments a drain. They misread the balance of payments. Patnaik repeats this invalid logic.
In truth, in the nineteenth century, nearly all the money paid out was market-mediated, against purchasing something, like the service of loans raised in London, where interest rates were lower than in India. Or these payments were made from income generated within India, like repatriated profits of trading and manufacturing firms. Every such payment either saved costs for India or created income in India.
The transfers from India to Britain made from the government budget were potentially debatable. The percentage of home charges (as the fiscal transfers were known) in national income varied. It was rarely above one percent, and in the 1930s, below half a percent. What proportion of this small amount was the drain?
The nationalists called guaranteed payments from the budget to private railway companies that earned too little profits a drain. Current research shows that the railways generated enormous positive externality in the Indian economy, such as ending dryland famines. Salaries and pensions paid to civil and military officers in top posts were controversial because Indians willing to accept lower salaries were blocked entry into the top-paying jobs. But this applies to a few thousand jobs in a workforce of nearly a hundred million around 1920. And the real value of any government officer, Indian or British, cannot be measured anyway.
The Indian nationalists complained that the British Indian army fought imperial wars at the cost of the Indian budget. “The cost of all Britain’s wars of conquest outside Indian borders were charged always wholly or mainly to Indian revenues.”[5] This was true until 1923, not “always.” And before that, the suggestion that all this was wasteful for India was valid only up to a point. Indian people worked in all corners of the empire, from the Caribbean to the Pacific. Imperial defence protected an enormous diaspora of Indian workers and capitalists comparable in scale to no other contemporary culture except the Chinese. Not surprisingly, Indian merchants remained steadfast allies of the empire until the Great Depression.
The drain argument rests on a further fallacy that Chaudhuri highlighted. It presumes that any money not repatriated from India to Britain would be automatically invested in India. It is easy to test if this is true. Half of India was ruled by princely states in the colonial era. If the assumption is correct, we should be able to prove it by showing that the princely states and precolonial states were more dynamic investors than British India. But there is no evidence to show that the precolonial and contemporary Indian regimes systematically invested in things that generated economic growth or human development.
For dramatic effect, Patnaik offers a number, 45 trillion dollars, as the size of the drain. To engage with that number and try to revise it will give its construction more credibility than it deserves, for the very thing the number measures cannot be defined.
To suggest that fiscal transfers from the colonies explained British industrialization makes a mockery of a large scholarship debating the origins of the industrial revolution. There are well over a dozen competing theories, from enlightenment to factor price, energy intensity, credible commitment, common law, marriage pattern, agricultural revolution, financial revolution, and others. Colonial transfer is not a serious contender in this debate. A series of careful statistical works in the 1980s examined what role colonial transfers played and failed to arrive at a conclusion; not surprisingly since transfers are hard to define and harder to measure.
In recent years, the politically charged battle for the soul of imperial history has been dominated by writers who package slogans – the Raj was corrupt or violent – in entertaining but shallow books. Patnaik’s writings and interviews belong in that sentimental class. This economic history deserves more depth.
Tirthankar Roy is Professor of Economic History at the London School of Economics. He is one of the most influential authorities on the economic history of South Asia and India, having published over 25 books and numerous articles. These include The Economic History of India (Oxford 2020) and How British Rule Changed the Indian Economy: The Paradox of the Raj (London 2019).
[1] Essay printed in Shubhra Chakrabarti and Utsa Patnaik, eds., Agrarian and Other Histories: Essays for Binay Bhushan Chaudhuri (New Delhi, 2017); see also https://newsocialist.org.uk/utsa-patnaik-interview/; and https://monthlyreview.org/2021/02/01/the-drain-of-wealth/
[2] “India’s International Economy in the Nineteenth Century: An Historical Survey,” Modern Asian Studies, 2(1), 1968, 31-50.
[3] For example, Jason Hickel, “How Britain stole $45 trillion from India,” https://www.aljazeera.com/opinions/2018/12/19/how-britain-stole-45-trillion-from-india?utm_campaign=wp_todays_worldview&utm_medium=email&utm_source=newsletter&wpisrc=nl_todayworld
[4] Huw Bowen, The Business of Empire (Cambridge 2005), 226.
[5] Patnaik, cited in Hickel.
