Sunday, February 15, 2015

The Drain of Wealth Theory


The Drain of Wealth theory was systemically initiated by Dadabhai Naoroji in 1867 and further analysed and developed by R.P. Dutt, M.G Ranade etc. 

The "drain of wealth" depicts the constant flow of wealth from India to England for which India did not get an adequate economic, commercial or material return. The colonial government was utilizing Indian resources- revenues, agriculture, and industry not for developing India but for its utilization in Britain. If  these resources been utilised within India then they could have been invested and the income of the people would have increased. Ranade opined that one-third of India’s national income was being drained away-in one form or the other. 

According to Dadabhai Naoroji, the following forms of drain can be identified:
  1. Home charges refer to the interest on public debt raised in England at comparatively higher rates; expenditure incurred in England by the Secretary of State on behalf of India; Annuities on account of railway and irrigation works; Indian office expences including pensions to retired officials who had worked in India or England, pensions to army and navals etc.
  2. Remittances to England by Europeans to their families.
  3. Remittances for purchase of British Goods for consumption of British Employees as well as purchases by them of British Goods in India.
  4. Interest charges on public debt held in Britain.

Economic impact of Britishers on 


Though commercialization of agriculture helped in generating marketable surplus, it benefitted only few farmers and commercial interest. Rather, for majority of farmers it created the problem of famines by destroying the self sufficiency on the part of villages. Problem of food shortage was felt. This introduced an element of instability in agriculture. There was a huge growth in agricultural debt due to presence of MAhalwari, Ryotwari, Permanent Settlement Systems for Land revenue collection.


Lop sided pattern of industrial development occurred. This effect was reflected in pattern of industrial employment and concentration of industries in few cities and towns, and was caused mainly by colonial character of our country. The composition of industrial output showed the dominance of consumer goods over producers and capital goods. Decline of village handicrafts and slow growth of modern industries affected the agriculture sector of economy.


Colonial rule brought a major change in the taxation environment from revenue taxes to property taxes resulting in mass impoverishment and destitution of the great majority of farmers. It also created an institutional environment that, on paper, guaranteed property rights among the colonizers, encouraged free trade, and created a single currency with fixed exchange rates, standardized weights and measures, capital markets, a well-developed system of railways and telegraphs, a civil service that aimed to be free from political interference, and a common-law, adversarial legal system.


In the trade sector India was turned into a market for British manufactured goods and supplier of raw materials to Britain, due to unequal tariff policy, biased stores policy, etc.

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