(Online Course) GS Concepts : Mordern Indian History – Drain of wealth

Subject : Modern Indian History
Chapter : Economic Impact of The British

Topic: Drain of wealth

Question : Discuss in brief the theory of Drain of wealth?


The main gist of the drain of wealth theory was that a large
part of India’s national wealth or total annual product was exported to England
for which the Indians got no adequate economic or material returns. This one way
drain of India’s wealth was the major cause of her poverty. The colonial
government was utilizing Indian resources- revenues, agriculture, and industry
not for developing India but for utilization in Britain. And had 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.


  1. The salaries and pensions of British civil and military
    officials working in India, interests on loans taken by the Indian
    Government, profits of British capitalists in India were all being met by
    the revenues collected in India. This was one way money was being drained
    away from India.

  2. The drain took the form of an excess of exports over
    imports for which India got no economic or material return. This ‘excess of
    export over imports’ according to A C Banerjee was possible through three
    means. Firstly, it implies private fortunes obtained by the Company’s
    servants in the form of illegal presents and perquisites from Indian princes
    and other persons in Bengal. Secondly, Company’s servants earned large
    incomes through their participation in the inland trade. And lastly, fortune
    made through private trade by the British Free Merchants. In fact, 1/3 of
    India’s total savings, almost the entire land revenue collection and 1/2 of
    government revenues comprised a portion of the drain.

  3. East India Company also provided military help to the
    Indian Princes in their fight for power against a rival claimant(s). In this
    manner in the period of 1761-1771 alone, the Company’s Government earned a
    net amount of £1,190,000 from the Indian princes. Large part of this money
    went in to the personal pockets of the British. Some of it was used to buy
    Indian products which were sold across Europe. The profit thus gained went
    into the pockets of the British. So Indian money was used to buy Indian
    goods The Company’s officials also received gifts for their help and India
    again did not gain any fiscal benefits in return.

  4. Unequal terms of trade- The economic nationalists argued
    that the main aim of the British policy in India was to make her a valuable
    market of the home country and to transform India into a supplier of cheap
    and a secure source of raw material producing agrarian country. They cited
    the protective tariffs and other discriminatory policies followed by the
    government as proofs While Britain and rest of the European powers imposed
    protective tariffs on foreign goods coming in, no corresponding import
    duties were imposed on products coming in India This exposed whatever
    industries that existed in India to tough competition from cheaply mass
    produced goods coming in

  5. In the parliamentary enquiry of 1840 it was reported that
    while British – cotton and silk goods imported into India paid a duty of 3½
    per cent and woollen goods 2 per cent, Indian goods imported into Britain
    paid 10 per cent on cotton goods, 20 per cent on silk goods and 30 per cent
    on woolen goods.

  6. To this unequal trade was added after 1813, cheap British
    factory made yarn and cloth which took away India’s local market from its
    own producers. India experienced deindustrialization over the half century
    following 1810 due to terms-of-trade shocks.

  7. The expenditure of armed forces required to maintain the
    expansive empire across the world. Afghanistan., Burma and so on, was met by
    Indians revenues and personnel. Military expenditure accounted to almost the
    1/3rd of the budget.

  8. The two most important forms of drain were Home Charges
    and Council Bills, also called invisible charges.

  9. Home Charges represented the single biggest source of the
    direct drain of wealth, the expenses in Britain borne by the Indian
    treasury. These Home Charges were a huge burden on the finances and
    contributed to a sustained and continuous deficit in the budget throughout
    the nineteenth century. Home charges included pensions to British Indian
    officials, army officers, military and other stores purchased in England.

  10. Council Bills- Council Bills were the actual means
    through which money was transferred. It does not refer to a piece of
    legislation. Council Bills are best explained by quoting from Sir John
    Strachey’s lectures given in 1888. ‘The Secretary of State draws bills on
    the Government treasury in India, and. it is mainly through: these bills,
    which are paid in India out of the public revenues, that the merchant
    obtains the money that he requires in India and the Secretary of State the
    money that he requires in England.’ Sumit Sarkar further breaks down the
    explanation: The would be British purchasers of Indian exports bought.
    Council Bills from the Secretary of State in return for sterling (which was
    used to meet the Home Charges). The Council Bills were then exchanged for
    rupees from the Government of India’s revenues. Next the rupees were used to
    buy Indian goods for export. Conversely, British officials and businessman
    in India bought Sterling Bills in return for their profits in rupees from
    British owned Exchange Banks; the London branches of these tanks paid in
    pounds for such bills with the money coming from Indian exports” purchased
    through-the rupees obtained through sale of Sterling Bills.”

  11. European Agency Houses and European Banks- With the use
    of the East India Company and the gradual flood of European traders in
    India, the indigenous banking houses like that of the Jagat Seth declined
    and were replaced by European Agency Houses and Banks, which were started by
    the Company’s servants. These Company servants opened these houses and banks
    after accumulating huge fortunes through their illegal private trade.

  12. The drain was not limited to just money or goods : but
    had wider ramifications for India. The drain frustrated employment
    opportunities in India and also that of investment.

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