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Dadabhai Naoroji and the Mechanism of 'External Drain'

B.N. Ganguli Indian Economic Social History Review 1964 2: 85 DOI: 10.1177/001946466400200201 The online version of this article can be found at: http://ier.sagepub.com/content/2/2/85.citation

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The Indian Econoinic and Social

History
Vol. II No.2

Review
April 1965

DADABHAI NAOROJI AND 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 deprivation of resources&dquo;, of the &dquo;bleeding drain&dquo;. The drain theory comprehends the essence of what he wanted to say as a patriotic citizen who had studied the causes of poverty in a colonial economy. From the angle of methodology this theory provides an excellent conceptual framework within which Dadabhais economic ideas and his assessment of the burning questions of his times easily fall into place to form a coherent whole so as to appeal to even a sophisticated student of modern economics.

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

zone

colonial economy governed by remote control ;

whitcmens colonies in the temperate as well as capital for economic
-

(2) India being quite unlike development ;

_ -

which attracted labour

~.
~

..

* 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 the Asia Publishes.
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(3) India being saddled with an expensive civil administration and an equally expensive army of occupation ;

(4)

India being a strategic base of operations that had to bear the burden of empire-building not only in India but also beyond her borders ;1

&dquo;

(5) 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 opening up the country to free trade-an euphemism for colonial exploitation -and towards the objective of creating highly paid jobs for foreign personnel ;
(6)
India being 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 principal 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

II
.

the country.

The concept of economic drain in the Indian context has an old lineage goring back to the age of mercantilism that witnessed the early career of the

British East India Company. Thomas Mun, the author of Englands Treasure
by Foreign Trade (1664), was
a director of the East India Company, the main business of which was the importation of luxury goods in exchange for silver from the east, particularly India. SirJosiah Child (1630-1699) was Governor. of the same company. Both were mercantilist writers. Mun said : &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 is imported in bullion and so adds to the Treasure of the Kingdom: Gold and 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 a country was considered unfavourable, while the opposite kind of drain fa,~ourable. One reason why Mun wrote on the subject of trade was to

1. During the period of Governor-Generalship of Lord Wellesley, who followed a militant external policy, Indian debt increased by £ 20 million, although he had received at least £ 1 million annually from the Directors of the East India Company for 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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87
defend the activities of his
company that
was

own

East India

Company.

Here

was

a,trading

tilism, and

was

importing luxuries, contrary to the tenets of mermanalso exporting silver to pay for them, another apparent

of the principle he himself had enunciated. Mun showed that both these economic activities, though apparently offensive were, in the long run, for the good of the State. Drain of silver to the east was justifiable, 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 bought more in silver than was drained away in the first instance. If luxury imports by the East India Company were stopped, foreigners would supply, the demand at a higher cost. Did not the Company also maintain shipping 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 involved 10,000 tons of shipping, 2,500 seamen, 500 ship carpenters and 120 factories 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.

infringement

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 more sensible view of the purpose of foreign trade and of the balance of payments including capital and service items. We find a faint glimmering of the awareness of this in Muns defence of the operations of the East India Company. It must have become eventually clear to practical traders that an export of bullion could co-exist with a favourable balance of trade and

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

The crude mercantilist concept of drain, however, died hard. Ion the Indian context Muns reasoning in favour of export of silver to the east seems to have lost its force almost a century later in the e~,r)~y days of EastIndia Companys rule in India, as evidenced by the testimony of some only the early British administrators. However, the basic economic situation i1B India had been radically transformed after 1757. A trading company had., by a curious combination of circumstances, become a sovereign ruler. The profit-making through trade became integrated with administration which also became an instrument of profit-making. A trading company could not conceivably function otherwise . Abstraction of a surplus on both trade
2. As Adam Smith said

East India Company.

later, a trader was a bad sovereign. He had in mind the

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88
and administration-profit-making par excellence-assumed proportion which were beyond the dreams of even the most avaricious merchant adventurers. The surplus had not only to be mopped up but had also to be transferred to England. There was thus an. unprecedented economic drain sometimes in devious ways, which drew the righteous indignation of some of the early British administrators. Such a situation was quite different from what confronted Thomas Mun and Sir Josiah Child in the 17th century when the East India Company was obliged to export silver to India, and the bulk 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 reverse movement of treasure after Plassey was an unprecedented phenomenon that 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 the outbreak of the Second World War. Secondly, the drain eventually ceased to take the form of transfer of specie, the most general form of purchasing power that could be used for waging continual warfare in the earlier centuries. It increasingly took the form of transfer of commodities through an export surplus which was liquidated not necessarily in the form of export of gold and silver from India. The transfer mechanism acquired a complex character 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 end of 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
:
.

the Exports in the East India trade, appears as a Balance consisting of the produce of the Companys of the Fortunes acquired by Indiof remittances Territorial Revenues, and unfavourable is an acquisition of so much viduals, instead of being Stock&dquo;. to our Public We may also recall in this connecadditional wealth of East India Company, became the tion how Dundas, a persistent opponent the 18th that he must reconcile himself to of century convinced by the end of British revenues India could only be realized the fact that the surplus and that it the was East trade India Company which through the medium of 3 of remittance.3 mode could provide a sure

Imports

over

against

us, but this Excess

_ _

Dadabhais version of the theory of economic drain

cated
as one

was as

sophisti-

thinking

would expect it to be in the climate of maturer economic in the mid-nineteenth century. He, however, quoted British

from ier.sagepub.com by Najaf Haider on p. March East Indla 7116, 2012 Company, 1754-1834, 3. C.H. Phillips, TheDownloaded

89

period in support of the drain theory. Let summarise a few typical strands of earlier thought to indicate whether there was a continuity of rational thinking on the subject of drain, which Dadabhai could justifiably make his own while presenting his own more refined version of the drain theory.
me

administrators of a much earlier

briefly

Let us take Sir John Shores testimony in his famous minute to the Fifth Report (1787). Sir John had said : &dquo;the company are merchants as well as sovereigns of the country. In the former capacity they engross its trade, whilst in the latter they appropriate the revenues. The remittances to 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 with the 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 by the foreign companies&dquo;. Thus Indias internal trade, even if it were to expand, 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 surplus&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; The causes of the external drain, according to him were (1) large annual investment in Europe; and (2) remittances of private fortunes for many years past, the impact of which was severely felt, at the time of writing, in the form of scarcity of specie for current transactions and the consequent depression in Indias agriculture and internal trade.5 But like Dundas, Lord Cornwallis was convinced of the prudence of maintaining the East India Company as a political as well as a commercial body, the fundamental reason being the mixed character of this organization which guaranteed remittance 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 the Governor-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 certificates for the equivalent in Chinese dollars which were to be exchanged at Canton for bills on London at the rate of 5s 6d for 365 days bills. To provide cover for this transaction, he withdrew 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 illustrates how China trade became part of the companys financial operations in the 19th
century.

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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 Commissioner of 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 3 million and daily poured into the lap of the mother-country a continual stream 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 of elaborate 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 theory had outgrown the strait-jacket of mercantilist narrowness because of the change in the objective conditions. The writers whom I have just quoted were dealing with the phenomena of trade between the mother-country and the colony, of trade between unequal partners characterised by inequality of advantage, disparity of bargaining power and an economic relationship resting on the exploitation of a dependent colony by a strong, metropolitan

power.

III Dadabhais forte was his capacity for statistical estimation on the basis of whatever statistics he could lay his hands on, imperfect and incomplete 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 which he always made an ample allowance. He was anxious to under-estimate, rather than over-estimate, in order to prove his point. The method of estimation he adopted is more important than the estimate itself, because it throws light on his conception of external economic drain and its distinctive character.
6. It is interesting to note that Dadabhai drew a parallel between the drain of wealth from India to England and a similar drain from England (with similar effects) during the 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 which large revenues have been drawn, fruitful field in which herds of Italian ecclesiastics had been pastured." At the beginning of the 16th century England was thus left materially and morally backward.

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91
From the Parliamentary Returns of Indian Accounts he compiled two series : (1) annual charges in India and (2) annual charges in England. Charges in India represented public expenditure. He assumed that onetenth 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. These items were as follows : (1) remittances to England by European employees for the support of their families and for the education of their children; (2) remittances of savings; (3) remittances for the purchase of British goods for their own consumption ; (4) purchases by them in India of goods of British manufacture; (5) purchases by government of stores of British manufacture in India and England not included in the Home charges. Charges in England&dquo; includes interest on public debt held in India and loss in exchange, and excluded interest on railway debt and debt incurred for productive works. &dquo;Home charges&dquo; did not figure during the period 1787-88 to 1828-29. Dadabhai made a rough estimate of the wealth transferred prior to 1788. Wealth transferred during the entire period was thus taken 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 (including booty and other invisible elements) of not less than 1500 million.
-

Dadabhai checked this estimate with the help of trade returns available for the period of about 50 years-1814 to 1865-taking into account exports, imports and bullion movements. His calculations gave a figure of an export surplus of 350 million, after making allowance for the gross undervaluation of imports into England and over-valuation of exports to India under the current system of &dquo;o~cial valuation&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 per
cent, 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 figure from 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 as the fact that Dadabhai was perceptive enough to view Indias export surplus-a recurrent and regular feature of her foreign trade-as a symptom of 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 expenditure in India and England respectively. This is not far from the modern perspective 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 type Dadabhai took into account, which he compendiously called a &dquo;Tribute&dquo; paid by a dependent economy; E for national expenditure; Y for national income; C for domestic consumption and I for domestic investment. It is easy to see that in the case of the country receiving the transfer (England in relation to India) Y==C+I+(X―M). National income (Y) would exceed domestic production (P) by an amount equal to (D -+- T) received from abroad [Y=P+(D+T)]. Since (D+T) is received in the form of imports, E (national expenditure) = P (current prod uction)-X + M, where M includes (D-E-T).

Let us look at the situation from the point of view of a dcpendent colonial 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 very nature 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 the medium 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-

pondingly squeezed..
In his life-time Dadabhai had to answer critics who had taken exception 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 be said that Indias export surplus represented payment for all kinds of invisible services rendered by the 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 mentioned. In justification he quoted Sir George Wingate who had described these payments as &dquo;Tribute.&dquo; He also referred to another striking description 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 the form of imports. He was, however, well aware of the fact that the balance of payments did contain an element which could not be described as a tribute viz., the remittance of interest on loans for railways, irrigation works and other productive purposes. He said : &dquo;I must not be misunderstood. I consider these loans as one of those things for which India is under special obligation to England. I do not allude to this item in any spirit of complaint... only mean that the interest, even supposing it to be all
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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 necessary in the case of interest on unproductive debt incurred for empire-building in India and outside the borders of India, in the name of Indias defence.
of what are known as services in the balance of accounts theoretical matter which cannot be easily settled. There was a tendency, in the last century and even comparatively recently, to oversimplify the problem by thinking of invisible services as a component of the balance of payments, so that the drain, if any, could be conceived only in terms of bullion movements. This was a vestigial remnant of mercantilism which has somehow shown a high survival value. It may be worthwhile to recall in this context what Edwin Cannan said in his Wealth half a century back (Wealth was published about three years before Dadabhais death). Cannan mentioned five non-merchandise items in the balance of payments : (1) cost of carriage of exports and imports; (2) payment fcr services &dquo;performed for people living in one country by persons who 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 specifically illustrated this by referring to Englishmen serving in India either in government or in other undertakings; (3) transfer of interest, dividends or rent on property held abroad; (4) earnings of foreign investment; and (5) &dquo;various payments of a non-commercial character made by people living in one country to people living in another.&dquo; Cannan mentioned in this connection reparations and political tribute. With reference to these five items in the balance of payments, Cannan observed (Weal tlr, p. 242 footnote) : &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 necessarily mean an exportation of bullion by alleging that the excess was balanced by theinvisible exports. This was a clumsy and confusing way of treating the matter. It is tolerable in regard to the first two items&dquo; (cost of carriage and remittances of foreigners serving abroad). &dquo;Since services can be conceived as invisible exports but it fails entirely in regard to the other tlaree factors&dquo; (italics mine). The idea of treating the services rendered by the Englishmen in India as an invisible export, for which there was legitimate payment, was not even tolerable to Dadabhai, although it was tolerable to Cannan. For one thing, Dadabhai held that the high salaries received by Englishmen in India was not commensurable with the services rendered. For another thing, since Indians were not associated with the public services, the railways and other undertakings in responsible positions the 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,

The

place

of

country is

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94

dividend and rent transfer of investment income and transfer of non-commercial 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 interesting dimension which has to be seriously considered in this connection. 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 our country. But there was something behind this evidently fallacious mercantilist formulation, which was nevertheless substantial. Dadabhai grasped the underlying economic reality firmly enough. He applied the criterion of the effect of public expenditure on the generation of income and employment within the country. Exportation and importation if they are a foreign monopoly, yield profits which do not generate domestic income and employment, but generate incomes and employment abroad. Here is a foreign leakage, to use a modern expression, or a drain The common man in India wanted to express as Dadabhai understood it. 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 or in England, stores of British manufacture. In these cases individual as well as public consumption failed to generate domestic income and employment. There was no offset, in the shape of the expansionary effect of public expenditure on local employment and income, for the heavy taxation borne by the poverty-stricken masses, which made extravagant public expenditure possible. 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 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 surplus in relation to the capital-exporting mother-country. He said : &dquo;the imports of Australia, 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 million and 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
a

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95 colonies. Dadabhai estimated that during the same period Indias &dquo;total exports (including treasure) are 456 million and the imports (including
419 million&dquo;. The import value included 72 million of and other forms of public debt which were not productive. loan railway &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 opium revenue which is paid by China makes up some 7 million for the political drain, and the rest must be withdrawn from the production every year, reducing the productive capital so much.&dquo; He demonstrated that capital development in other parts of the British Empire (excluding the tropical colonies) was reflected in a high value of per capital exports, whereas for India per capita exports were insignificant in value and reflected the reverse of domestic capital formation. He had no information about the foreign indebtedness of British colonies other than India, the servicing of which could 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 entire public debt was so much foreign debt and that the rate of interest was 5 per cent. Making a deduction on account of interest payment on this basis, Dadabhai arrived at the following figures of &dquo;true export trade per head of population&dquo; for the year 1885 : ..

treasure) only

Dadabhai concentrated his attention on the basic difference between India and other British colonies, i~i~., that, in the one case, foreign trade was 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 we did not suffer the exhaustion we do, and even if we found it to our benefit to borrow from England, the case would be one of a healthy natural business, and the interest then remitted would have nothing to be deplored in it, as in the case of other countries, which, being young, or with undeveloped resources and without much means of their own, borrow froin
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96
others and increase their
United States,
or

own wealth thereby, as Australia, Canada, the other native-ruled country that .so borrows.&dquo; (italics any

mine)
He thus came to the conclusion that the inflow of foreign capital in the Indian context was caught in a vicious circle and was prevented from playing a constructive role which it was expected to do in a healthy state of the economy. In a mood of anguish and desperation which was foreign to 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 for these loans she must find so much more for interest; the whole thing moving in a most vicious and provoking circle. Will nothing but a catastrophe 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;they distribute the produce of the country from parts where it is produced or
But &dquo;every country in the benefit of a large derives by capital, building railways, borrowed interest capital ......... Excepting paid for such part of such to the the of rest the whole inborrowed capital foreign lending country, come remains in the country.......... In the United States every cent of the income of the railways (excepting the interest on the foreign loan) is the 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 home establishments, government superintendence and what not in England, a portion of the income must go from India; then a large European staff of

is in abundance

to the

parts where it is wanted.&dquo;

borrowed

even

.....

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 public works is not how to stop them, but how to let the people of the country
have 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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Dadabhais observations on the role and character of foreign capital in relation to foreign trade in the case of Englands tropical colonies, such as India, as compared with whitemens settlements in other parts of the British Empire, have been amply confirmed by the results of recent research.8 During the period 1863-1913, Great Britain had invested about 4 per cent of her national income overseas, the percentage being as
as 7 during the latter part of the period 1905-1913. Roughly twothirds went to the whitemens settlements, Canada, U. S. A., Argentina, Australia, together with a great migration of about 60 million people including many with acquired skill and training as well as enterprise. Investment was thus of the type of direct investment in the general economic development in these newly settled areas. According to Ragnar Nurkse, the colonial pattern of foreign investment, i.e., concentration of investment on extractive industries producing raw materials for export to advanced countries, in general, and to the mother-country, in particular, played a minor role. Thus three-fourths of British foreign investments were accounted for by public investments or public utility investments, and the rest by banking, insurance, manufacturing and raw-material extraction. For Great Britain capital outflow secured a widening of capital, in the absence of its deepening in her own economy. But there is no doubt that capital development in these areas, through the construction of economic overheads, stimulated the development of primary production under favourable natural conditions and also the export trade in primary commodities. Whether this was colonial economic development is a matter of semantics, a question of definition. The situation was, as John H. Williams has characterised it, that &dquo;England had found it convenient to 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 greater part of their history&dquo;.9

high

The tropical colonies of England, including India, received only one-third of the total capital overflow. Nurkse says that this part of British capital &dquo;was employed in a different type of area where its achievements were much more dubious : tropical or subtropical regions that formed 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 Economic Journal, June, 1929, p. 208.

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railways accounted for one-tenth of the total British railway securities in 1914. 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 Dadabhai tried to give a balance-sheet. Nevertheless, he quotes with approval
the findings of L. H. Jenks (British Experience with Foreign Investment in Journal of Economic History, 1944, Supplement) that in the case of India, &dquo;the railway did not give rise to a flood of satellite innovations10 and destroyed more employment opportunities than it opened up&dquo;. It is now generally recognized that the colonial pattern of investment in extractive industries tended to promote lopsided rather 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 character which has passed into legend. In respect of capitalistic enterprise in these industries what a character in Bernard Shaws play, Apple Cart, said, perhaps too sweepingly, about British overseas investment in general, is true to life : &dquo;England sends her capital abroad to places where poverty and hardship still exist : in other words where labour is cheap. We live in comfort on the imported profits of that capital&dquo;. If Dadabhai had been alive when Apple 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 theory could be sustained in the context of a sizable export surplus which India had in relation to Britain. Dadabhais critics who had not shed their mercantilist notions thought that an export surplus did promise a profit to India 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 precious metals. Was not India a sink of precious metals ? If India was prosperous as a sink of precious metals before the period of the British rule, how could she 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 instructive 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 the revolutionary effects of railway development in India.
a

false prophet with

regard

to

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Dadabhai started off by arguing that &dquo;India has not got its imports of silver as so much profits on its exports or making up so much of deficit of imports against exports.......... The import of bullion has been chiefly from commercial and financial necessities&dquo;. During the period 1801-1863 the net imports of bullion were 234,353,686. From 1864 to 1869 the net imports of bullion were 101,123,448. (Dadabhai admitted that these were 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 of the 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. Deducting only 66 million for wastage for the sixty-nine years, there should be in circulation 200 million.......... Striking off 50 million for remelting, though at a loss of 2 per cent (the charge for coinage), I take the coinage as only 150 million. Deducting this amount and the wastage 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 of 69 years, as against 30s per head for a period of 12 years in the case of the United 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 no use for national purposes&dquo;. The Herschell Committee of 1893 estimated that 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 the newly imported silver had during these years passed through the mint&dquo;. This finding, although it relates to the subsequent two decades, corroborated 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 East India Company first drain away from India, before it, as a matter of necessity, began to re-import bullion He quoted the testimony of Sir John Shore and Lord Cornwallis. During the period of 50 years before Plassey India had imported through the East India Company goods of the total 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 bullion from India. Although remittances to China were normally financed by government by means of bills, a large amount of silver had been remitted.
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from India. Sjlver bullion had also been transferred to Europe by individuals in considerable quantities. Sir John had no hesitation in coming to the conclusion that current silver had greatly diminished in quantity, and that further depletion was expected for three reasons : (1) &dquo;that the old channels of importation by which the drains were formerly replenished were in great measure closed&dquo;; (2) that Madras, Bombay and China had to be 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 of its silver&dquo;. Writing at about the same time in 1790, Lord Cornwallis confirmed 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 the economic 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 they may have taken over to their country in various ways independently of the customs house, with themselves in their boxes ? The East India Company and their servants carried away via China or direct to England-the former the surplus of revenue, the latter their savings and their bribes-in specie&dquo;. Here was &dquo;drain&dquo; par excellence on a large scale. 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 in a period of 69 years&dquo;.
.........

presented brings out incidentally certain signifipeculiarities of the mechanism of Indias trade and transfer of payments. It is necessary to underline them, because, in my judgment, they are part and parcel of Dadabhais conception of external
cant structural

The narrative I have

economic drain.

Dadabhai pointed out that &dquo;the present exports of British India consist 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 political enclaves that virtually formed separ4te economic units from the point of view of their external trade : trade between any of them and British India was of the nature of international trade in the classical sense. Dadabhai
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noted that the Indian States &dquo;have no foreign drain except the small These States, therefore, amount of tribute of about 700,000........ for the ordinary trade and merchandise receive back for the exports of their of merchandise and in imports profits on such exports, full returns and a terminal point a maritime Province treasure&dquo;. Since Bombay was to in the routes of commodity movements prior exportation, this Presidency In had an excess of imports over exports. 1884-85, for example, the to excess was Rs. 5,55,46,756 in relation Rajputana and Central India, Rs. and Rs. 1,48,91,355 in relation to Berar 8,67,688 in relation to Hyderabad, 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 of the 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 which British India was exposed.

opium trade with China played an interesting role in the functioning of the mechanism of external economic drain. I quoted Dadabhai to say that the East India Company transferred its revenue surplus, and its corrupt officers their savings and clandestine gains, via China. 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 by being poisoned.......... All the profits of opium go to the same way of the drain to England. Only India shares the curse of the Chinese race in being the instrument. This opium trade is a sin on Englands head and
The
a curse on

India&dquo;.

Leaving aside the ethics of the opium trade, what is of greater interest is its decisive influence on the changing fortunes of the East India Company and 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 sending any opium to be sold in China on its own account, as a commercial organization they were much concerned with the success of their public sales in Calcutta and as administrators they were impelled by the necessity of encouraging buyers at the Calcutta opium auctions. Gradually the administration had to calculate not merely the quantity which could be sold at the existing high prices but the prices at which competitive supplies could be sold in the China market. By the end of the 19th century Indian opium had lost its character of monopoly in the China market and the trade was
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102 The competition was from Persia and from China itself.l1 Thus Indian exports of opium declined from 91,798 chests in 1882-83 to 75,384 chests 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 the operation of competition from countries whose currencies had depreciated equally 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 year of the famous Charter Act, it had become evident to even the worst critics of the East India Company that the Company had operated its China trade, running at an average rate of more than 1 million per annum, at a profit. Out of this profit was met part of the deficit in the revenues 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 remittances 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 would otherwise have been returned to India (on account of Indias exports of opium worth 5 million dollars and of cotton and other agricultural produce worth 1 million dollars) was absorbed into the Companys treasury in exchange for bills on London. The process was assisted by the practice, developed by the American traders in 1833, of &dquo;taking bills on London from the United States to Canton, and selling them there to the traders wishing to make remittances to India&dquo;. Thus Professor C.H. Philips has rightly concluded that &dquo;the China trade had afforded the company convenient means by which to meet the payments incurred in England on account of the Indian territories&dquo;. East India Company 1754-1834, page 288). It was also a fact that the Company paid its regular dividend out of the sure 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 China trade oflfset the deficit on Indian remittances on commercial accounts (transfer of dividend payment) and Territorial accounts (Home charges as well as other kinds of remittance), the drain as conceived by Dadabhai was less than what it would have been otherwise. Dadabhai, however, argued that &dquo;Indias miseries would have much sooner come to the surface.... But this trade (opium trade) has prolonged the agonies of India&dquo;.

dwindling.

11. Non-Indian opium, inferior in quality but cheaper in price, came to be adulterated with Bengal opium when the price of the latter was too high. Chinese opium had a worse taste and was weaker as a stimulant.
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