British Economic Policy

in India
Phase 1 Mercantilism (1600-1757)
• Its role was that of a trading corporation which exported
Indian goods in exchange for foreign goods or bullion. So it
tried to develop new markets for Indian products abroad and
increased Indian exports. By 18th century, Indian clothes had
become so popular in Britain that the British governments
imposed stiff trade barriers on Indian products.
• However, unlike the free trade prevailing in India, British tried
to mix politico-military power with trade, used bribes,
negotiations and show of force to gain trade concessions and
monopolies.
Phase 2 Mercantilism with Political Power
(1757-1813)
• This was the phase where company had control of Bengal
resources as well as had nizamat powers in Bengal (1765
onwards). So the company began to misuse its powers to
rapidly expand trade. Thus the expanding trade brought only
poverty to India.
• It used revenues of Bengal Bihar and Orissa to finance its
Indian expenses and to pay for Indian exports.
• It began to coerce Indian artisans to produce on their terms -
forced labor, high input prices, lower output prices. Since it
had nizamat powers as well, no one could check this. On top
of it, trade barriers continued on Indian goods in Britain.
Phase 3 Industrial Capitalism (1813- 1880)
• This was the time Industrial Revolution had taken firm ground in Britain
and Britishers was manufacturing items in factories.
• The Charter Act of 1813 ended company's monopoly on Indian trade
(except tea) and so the British manufactured goods began to pour in.
Indian handicrafts were now ruined. India became a source of raw
materials. Colonization of Indian economy was firmly practiced.
• These manufactured goods were imported without any duties while
Indian goods had to face trade barriers in Europe.
• Other manifestations of this policy were in increased annexation,
anglicization of Indian education and missionary activities, development
of means of communication.

Phase 4 Finance Capitalism (1880 onwards)

• British capital was invested in Indian Railways, banks, insurance,
ports.
What Is Drain of Wealth Theory?
• It refers to the economic critique of colonial rule in India
that was advocated by the early nationalists.
• They described the constant one way flow of wealth from
India to England for which India received no returns as
'Drain of Wealth'. This occurs when gold and silver flow out
of a country as a result of an adverse trade balance.
Origins of Drain of Wealth
• In the 17th and early 18th centuries, the English East India Company
used to import bullion - gold and silver to the tune of 20 million, and
funds from England for purchasing goods in India. These goods were
then exported to Europe for sale.
• After the Battles of Plassey (1757) and Buxar (1764), the Treaty of
Allahabad (1765) was signed, which entitled the Company to collect land
revenue from the province of Bengal, the Company began generating
surplus revenues(after paying the duties and tribute to the Nawab of
Bengal).
• The Company used these revenues to purchase goods in India which
were then exported for sale in Europe and elsewhere. It eventually
eliminated the need for the Company to import bullion and funds from
England to finance its operations in India.
• It resulted in a situation where Indian revenues were used to purchase
Indian goods which were then exported out of India, without India
getting anything in return. This was the beginning of drain of India's
wealth.
Drain of Wealth was Facilitated by the
Position Enjoyed by East India Company
• The Company initially had a dual role. On one hand, it
functioned as a government entity which had the power to levy
and collect taxes such as land revenue.
• On the other hand, it also functioned as a commercial entity and
invested the revenues collected in India to expand its business.
The revenues going to the Company had been termed by
historians as a political tribute.
• This was because the political power enjoyed by the Company
was the reason for its ability to generate revenues out of Indian
territories and it was a tribute in the sense that India did not get
anything in return for paying such revenues.
• It was essentially a political trade and thus not a normal
trade. It generated a revenue surplus through –

1. Oppressive land revenue policies

2. Monopolistic control over Indian markets
3. Exactions made by company officials

• The company used this revenue surplus as investment and

made purchases with it. This system, however was
brought to an end by the Charter Act of 1813.
Constituents of Drain of Wealth
1. Territorial Expansion

• The Company used the revenues for extending its territories in India
i.e., they were used to finance the Company's military campaigns
against native rulers.
• Territorial expansion enabled the Company to in turn generate greater
commercial revenues in the form access to Indian goods for exports.
• Thus, under the Company's rule, India was caught in a never-ending,
self-contained system of drain of wealth.
2. Movement of Private Wealth
• Apart from the Company's revenues, the drain also included the movement of
private funds to England. This had happened primarily by the means of bills of
exchange. Under this facility, bills of exchange can be purchased in India using
money raised in India.
• These bills can be exchanged in England for local currency. Some of the private
funds that were accumulated also included the earnings of Englishmen from
plunders during wars, bribes obtained from the native states, and the wealth
accumulated from fraudulent business deals with Indian merchants.
• According to an estimate by G.A. Princep, a reputed English businessman, over Rs. 1
crore was sent away from India every year between 1813 and 1820 as private
wealth.
3. Payments to Foreign Banking and Insurance
Companies
• Another form of movement of wealth away from India was the financial capital.
• It included the monies paid to banks, insurance companies, shipping companies
etc., in England for the services they render in India.
• One estimate puts this amount at Rs. 57 lakh per annum between 1813 and 1820.
4. Remittances by the Company - Home Charges
• The Company's remittances to England also formed a major part of the
drain. This included,
➢ Salaries and pensions paid to the Company's employees in England.
➢ Interest amount on loans raised by the Company in England.
➢ Dividends paid to the Company's stockholders.

• Such remittances by the Company later came to be known as the 'Home

Charges' when the British Parliament took over administrative control of
India. Home charges also included,
➢ Salaries and pensions paid to the British civilian and military
personnel posted in India which were remitted by them to England.
➢ Store purchases made in England by the Secretary of State on behalf
of Government of India for the civilian and military departmental
needs.

• Though the amount remitted varied every year, it was estimated to be in

the range of one to three crore rupees per annum.
Reasons for the Drain of Wealth
• One of the earliest propagators of the drain of wealth theory was
Dadabhai Naoroji. In 1867, he put forward the idea that the
colonial rule was draining and bleeding India of its wealth.
• He wrote (in his work "Poverty and Un-British Rule in India", 1880)
that it was the pitiless action of British policy which was eating
India off its substance.
• He lamented that the perversion of economic laws in India by the
British rule is draining India of its prosperity and is destroying the
nation.
Dadabhai Naoroji identified the following reasons for this
drain:
• All the civilian and military expenses of Britain were paid by India.
• Indian revenues paid for the territorial expansion of the British Empire, within and
outside India.
• Annuities that were paid on railway and irrigation works in India which were financed by
costly British capital.
• The skewed nature of free trade imposed on India - with restricted exports and free
imports.

Another well-known argument supporting the drain of wealth was given by R.C. Dutt.
• In his work, "Economic History of India", Dutt had equated the drain of wealth to
moisture being sucked out of Indian soil to fertilize the lands in England.
• He commented that the economic drain out of India was so severe that it had
impoverished one of the most prosperous countries on earth.
• He lamented that India was reduced to a land of famines which were frequent,
widespread and fatal as a result of this drain.
Impact of Drain of Wealth on Indian Economy
• It had impoverished all the section of Indian society with peasants being
the worst victims. They bore the brunt of the taxes raised by the
Company and later by the Government of India in the form of land
revenue.
• It drained India of its precious capital which could have otherwise been
invested in industrialization and modernization of agriculture in India.
• The drain of Indian wealth became a major source of financing the
Industrial Revolution in England and is also the reason why such
revolution did not take place in India.
• Dadabhai Naoroji had estimated that every year, anywhere between 30
million to 40 million pound sterlings were flowing out of India. He
described it as the main cause of India's poverty.
• It also resulted in a 'moral drain' which consisted in exclusion of Indians
from position of trust and responsibility in their own land.
Impact of Drain of Wealth Theory on Indian
Nationalism
• The drain theory was instrumental in countering the reason given by the British for the
colonial rule which was India being the "White Man's Burden". It became evident that the
colonial rule in India was exploitative.
• The economic criticism of British rule had helped in shattering the myth of benevolence of
British administration in India. While the colonial rulers had justified their control over India
as means for India's economic development, Indian nationalists were able to counter this by
asserting that India was economically backward precisely because of the British rule, the
British free trade, industry and capital.
• It was instrumental in laying the foundations for the demand for Swaraj which was raised by
the Extremist leaders such as B.G.Tilak. The demand for Swaraj, mentioned in the 1906
session of the Congress at Benaras, can be seen as a direct outcome of the drain theory.
• It was successful in capturing the imagination of peasants for whom the drain was an easy
concept to comprehend. It was thus helpful in expanding the mass base of the freedom
struggle.
• Drain of wealth theory highlights the mercantile character of British rule in India that was
inherently exploitative. It shook the myth of Britain's benevolence and laid strong
foundations for ensuing freedom struggle.
Commercialization
of
Agriculture
• Commercialisation of agriculture is a phenomenon where agriculture is
governed by commercial consideration i.e. certain specialised crops began to be
grown not for consumption in village but for sale in national and even in
international market.
• Commercialization of agriculture in India began during the British rule.
Factors Responsible
• British utilitarians, their free trade policy, economic
colonization of India as it became a raw material supplier.
• Cash based economy encouraged by Britain coupled with
huge Land Revenue demand.
• Breakdown of self-sufficiency of villages. Indian economy
became closely interlinked and also linked with international
markets. Need to balance trade of China led to cultivation of
opium.
• Development of means of transport like railways, Suez canal.
• Coercive practices followed by Britain backed by legislations.
• British capital.
Pattern of Commercialisation of agriculture
• It was a coercive process and exploitative. The benefits never accrued to the peasants
because of this. A classic case is indigo plantation. The farmers could hardly reap any
benefits of higher prices due to monopoly coercion by the manufacturers (often £
earlier on and later Indians) while the lower prices were passed on to them. The
coercion element prevented Commercialisation of agriculture from becoming a tool for
the modernization of agriculture.
• It involved plantations where land was owned by European planter and labor was
hired. It also involved indigo type cultivation where a contract was signed with the
peasant.
• It involved regional development only. Only some pockets were suitable for some
crops.
• The crops were cultivated keeping British needs in mind. Thus cotton production in
deccan was encouraged due to American civil war. Jute came up in Bengal to serve
English factories.
• The cultivation of indigo declined after the synthetic dye came up, opium grew till 1900
then decline as China stopped importing opium. Wheat export began to increase to
Britain and it was produced in areas in Maharastra despite not being a staple crop in
the region. Bengal rice was exported to China, SE Asia.
Impact
• Volatility killed. Widespread poverty. Coercion. British grip
on India increased.
• Famines (food grain production lagged behind the
population growth and the element of coercion meant
that land was forcibly diverted from food grains to cash
crops disregarding market signals), agricultural
indebtedness.
• Revolts, growth of nationalism.
Railways
Factors Responsible
1. Free traders and their influence.
2. Good for capital.
3. Good for British iron and steel industries.
4. Good for administration.
Features of Railway Development
• Till 1869, railway development was with private capital assuring
5% guaranteed rate of return with full capital back at the end of
99 years. But this proved inadequate and slow although in this
period railways attracted some £70 mm of foreign capital.
• So from 1869-1880, railways were built as a state enterprise.
From 1880 onwards, both private and public capital was used.
• All capital was British. Indian capital as well as other European
and American capital was not allowed. Till 1901, Indian Railway
was a losing concern and all losses to private capital were made
good by British government.
• Guaranteed return on cost led to inefficiencies. Against and
estimated cost of £9,000 per mile, actual cost was £30,000 per
mile. When the government began to construct on its own, the
cost turned out to be £12,000 per mile.
• Railways were just another colonial enterprise keeping in mind
only colonial interest in design (connected internal markets
with ports only and not with internal cities, connected frontier
areas to facilitate army movement), implementation and use.
• Even the coal used to run the railways was imported from
Britain. The transfer of technology remained confined to low
technology areas like plate laying, bridge building or tunneling
while the higher technologies were never Indianized.
• Many nationalists believe that such capital could have been
much more beneficial had it been invested in irrigation.
• But when English left, they left behind 65K km of railway lines -
obviously an unintended product of British imperialism.
Economic Transformation of India
Decline of Indian Handicrafts
Factors Responsible:
1. The character of British rule.
2. The misuse of political-administrative power by British. They
used to force artisans to work for them at low wages, pay less
for output, pay more for input, reveal trade secrets. So Indian
manufacturing became an unprofitable venture.
3. Policy of one way free trade due to impact of utilitarians who
emphasized laissez faire.
4. Policy of annexation resulted in loss of patronage and loss of
market as well.
5. Westernization of India - missionaries and middle class.
Consequences
1. De-industrialisation, pressure on land increased,
de-urbanization.
2. Poverty, famines.
3. Class of landless labor increased in number.