by Utsa Patnaik
TABLE 9.3: Estimated Value of Drain from India, 1765–1900
While India’s entire external earnings went directly into the Secretary of State’s account in London, they were offset in accounting terms by administering a large number of arbitrary invisible liabilities denominated in sterling. These included all the annual drain items charged to the Indian budget under Expenditure in England and were expressed both in sterling and in rupees. These were also known as the Home Charges and had military expenses and interest on debt as the main components. There is a misconception that Home Charges were on account of the foreign administrators’ recompense in sterling for pensions, leave allowances, and the like. But all these administrative charges added together, based on budgetary data from 1861 to 1934, amounted on average to only 12.7 percent of the Home Charges.
Interest payments in sterling constituted the largest item, over half of Home Charges, not because there was much investment inflow (the entire subcontinent had received hardly one-tenth of total British foreign investment by 1913) but because practically every large extraneous expense was partly or wholly charged to the Indian revenues and their excess over India’s export surplus earnings was recorded as increase in India’s sterling debt. These extra expenses comprised the costs arising from Britain’s many imperial wars of conquest outside Indian borders; the sterling cost of suppressing the Great Rebellion of 1857 in India; indemnifying the East India Company as governance passed to the Crown and guaranteeing a return from the Indian budget to its shareholders; the cost of telegraph lines—the Red Sea line and the Mauritius to Cape Town line; the cost of maintaining British legations in a number of countries; the cost of importing monetary gold in the 1890s for the reserve requirements of the gold exchange standard, most of this gold being later absorbed by Britain against issue of securities; and many such items.
These costs, always in excess of India’s fast-rising foreign earnings, were shown as a cumulating debt that India owed. There was a quantum jump by nine times in sterling debt between 1856 and 1861 alone, from £4 million to £35 million against the cost of suppressing the Great Rebellion. Sterling debt rose again in the 1870s, doubling to £70 million, and exceeded rupee debt in the mid-1880s, again registering a quantum jump from 1891 as monetary gold was imported by the government for reserve requirements. By 1901, total sterling debt stood at £135 million, over one-fifth of British India’s GDP and eight times its annual export surplus earnings.
From the turn of the century, four-fifths of the monetary gold, imported at great Indian expense for backing its currency, was physically shifted to London against issue of British government securities by suitably amending the provisions on reserve requirements. Inflow of this “Indian gold” over several years, eagerly awaited by private investment firms in London, was the basis for extending loans to these firms at a low interest rate, namely pumping cheap liquidity into the London money market.35 India, meanwhile, continued to pay interest on the debt incurred for importing the gold. Figure 9.3 traces the movement of sterling debt from 1837 to 1902.
Figure 9.3: India’s Sterling Debt, 1837–38 to 1901–02
Source: Statistical Abstracts for British India, various years (Department of Commercial Intelligence and Statistics, India).
Because the government in Britain controlled the nature and amount of invisible liabilities it chose to heap on India, it could adjust these liabilities to the annual fluctuations (that it could not control) of export surplus earnings; and second, it did not confine total liabilities to the actual total of external earnings but imposed indebtedness whenever it needed extra funds. The adjustment was always carried out in a non-symmetric manner.
When India’s export surplus earnings rose to an unusual extent, additional demands were promptly added to the normal drain items, in order to siphon off these earnings. In 1919, export surplus earnings reached a peak of £114 million. War materials worth £67 million imported from India were not paid for by Britain constituting a forced contribution.36 Additionally, munificent “gifts” from India were presented by the British to themselves. For example, an additional £100 million (a very large sum, exceeding India’s entire annual budget and amounting to 3 percent of Britain’s national income at that time) was transferred as a “gift” from India to Britain during the First World War, a gift no ordinary Indian knew about, followed by another £45 million “gift” the next year, both by increasing India’s debt burden.37 On the other hand, if India’s export earnings fell, owing, say, to world recessionary conditions, the sum demanded as sterling tribute was never lowered, and any gap between tribute and actual earnings was covered by (enforced) borrowing by India. Even during the Great Depression years, when India’s export earnings fell drastically, the tribute was not lowered, so in addition to enforced debt, the large distress outflow of financial gold was also mandated.
Such manipulation of invisible liabilities by government ensured that, over any given run of years, India’s current account was always made to remain in deficit no matter how large its merchandise surplus became, excepting the two years of import surge after the First World War when there was a commodity trade deficit. (Gold outflow during the Depression years was non-commodity or financial gold as explained in the next chapter.)
Both Naoroji and Dutt were acutely aware that when monies raised from producers in India were not spent in their entirety within the country under normal budgetary heads it meant a severe squeeze on the producers’ incomes. Dutt supported and quoted an influential administrator, George Wingate, writing in the 1830s: “The tribute paid to Great Britain is by far the most objectionable feature in our existing policy. Taxes spent in the country from which they are raised are totally different in their effects from taxes raised in one country and spent in another.… As regards its effects on national production, the whole amount might as well be thrown into the sea as transferred to another country.”38
They were right, for surplus budgets to an unimaginably large extent were being operated with a strongly deflationary impact on mass purchasing power. (The budgets appeared to be balanced only by including the drain items on the expenditure side.) Such income deflation was the necessary economic mechanism of imperialism since there was no overt use of force to promote export crops save in the early years of indigo and opium cultivation. Income deflation reduced the producers’ consumption of basic staple food grains and achieved both the diversion of cultivated land area to non-grain export crops, and the export of food grains. The steady decline in per capita food grain absorption in British India was an expression of this income deflation.39 What needed to be added to Wingate’s remarks is that for the colonial rulers, the taxation revenues in the Indian budget explicitly set aside as Expenditure in England were not “thrown into the sea” but were embodied in vast volumes of goods that were completely free for Britain, which imported them far in excess of its domestic needs for re-exporting the balance to other countries.
While the pre-British rulers, including invaders, had raised taxes, they had become a permanent part of the domiciled population, spending all public funds within the country. There was no tax-financed export drive producing a drain, hence no income-deflating impact on producers as under British rule. Naoroji and Dutt pointed out that the very existence of the large number of specific heads of spending outside the country, which constituted the drain items in the budget, arose from India being a colony, run for the sole benefit of the metropolis. Home Charges were not the cost of administering India, for the regular salaries of British civil and military personnel serving in India were paid from the domestic expenditure part of the budget. The sterling charges were for furlough, leave, and pension allowances and averaged only 12.7 percent during 1861 to 1934. The major part, over 77 percent of Home Charges, comprised interest payments on debt arising mainly from military spending abroad and current military expenditures, while 10 percent went on purchase of government stores. The cost of colonial wars of conquest outside India was always put partly
or mainly on the Indian revenues.40 This parasitic pattern was to be disastrously repeated as late as 1941 to 1946 when the enormous burden of financing Allied war spending in South Asia was put on the Indian revenues through a forced loan, raised through a rapid profit inflation that resulted in three million civilians starving to death, a matter we discuss in a later chapter.
We have talked of the metropolitan economy appropriating a part of the surplus of the colony gratis, which constitutes the drain. But since a part, however small, of these drain items were expenditures for specific purposes, whose recipients were specific economic agents in the metropolis being compensated for specific services rendered, the question arises: can we legitimately talk of the metropolis extracting a “drain” from the colony?
This question can be answered on two levels. First, how the proceeds of the drain are distributed is irrelevant to the fact of the drain, just as how the proceeds of an extortion racket are distributed and how the different agents involved are compensated for their services is irrelevant for identifying the fact of extortion. Colonial drain was analogous to extortion; and the claim of the metropolitan country that it was providing “governance” was analogous to the claim of the extortionist that it provided “protection.”
Second, even if local administrative functions had been transferred in entirety to Indians, this, while desirable on independent grounds, would not have reduced the drain by one iota, as long as political control was retained by Britain, so that it continued to link the internal budget with external earnings. As we have seen, the whole of India’s external earnings was intercepted in London and appropriated by Britain, while its rupee equivalent was “paid” to producers in India who had earned the export surplus, out of taxes raised from the very same producers. Whatever specific invisible liabilities were detailed on the debit side to justify this appropriation affected neither the actual existence of this drain nor its value. Even if, hypothetically, no sterling leave and furlough allowances or pensions for British administrators and soldiers were charged to the revenues (these in any case accounted for only one-eighth of the Home Charges), these particular charges could have been substituted by any other items the rulers’ ingenuity could devise—say by the cost of maintaining some of the Queen Empress’s many palaces in Britain, on the argument that she ruled India.
CHAPTER 10
Further on Colonial Transfers and Their Implications
J. K. Galbraith, in his review of Keynes’s Collected Writings, wrote impatiently that Keynes “became concerned with the trivial intricacies of currency and banking in India.… On this he wrote a monograph, Indian Currency and Finance… Any scholar of moderate capacity could have learned all that was useful to know about the subject in about three months, perhaps less.”1
Galbraith could not have been more wrong. Appropriating from India (and smaller colonies) year after year before the First World War, at least £ 40–50 million in gold and foreign exchange earnings for imperial ends, was not a “trivial” matter. The smooth functioning of the international gold standard depended on it and also Britain’s position as the world capitalist leader, with the pound sterling being considered “as good as gold” and with the dollar as yet not in the picture. The question for imperialist rulers was one of devising the most efficient monetary and exchange rate system for maximizing and appropriating India’s external earnings. This question engaged some of the best English minds of the time. Not only did Keynes study the Indian financial system, which he found “intricate and highly artificial,”2 he gave lecture courses to students in Cambridge on the subject for a number of years and gave evidence to or was a member of a number of official Commissions on Indian finance and currency (the Chamberlain, Babington–Smith, and Hilton Young commissions, and for a time the Indian Fiscal Commission).
TABLE 10.1: Depreciation of Rupee against Sterling, 1871–1901.
Source: Statistical Abstracts and R. C. Dutt, Economic History of India.
The reason that there were so many commissions at short intervals on Indian financial matters was that the prolonged global decline of the price of silver relative to gold during the quarter-century after 1871, hence rupee depreciation (as the rupee was a silver currency), created specific problems of maintaining the transfer to Britain. Later on, the sharp appreciation of the Indian rupee during the First World War created converse problems of appropriating external earnings. The steep fall in the price of silver, especially from the 1880s, made Indian goods cheaper in gold standard countries, and exports grew considerably, as did the exports of Japan, which also had a silver currency. But unlike Japan, India was subject to the drain, entailing a downwardly inflexible sterling demand on exchange earnings. When the rupee depreciated, more rupee taxes had to be raised from the local producers to meet this sterling demand.
Suppose that in a given year in the 1870s, as usual, India’s entire commodity export surplus earnings of £15 million was taken by Britain, while Council bills to an equivalent rupee value were issued that charged the sum to the Indian revenues. This meant that at the initial exchange rate of £ 1 = Rs.10, under Expenditure in England, Rs.150 million had to be set aside in the budget to pay out against Council bills tendered in India. When the rupee depreciated to £1 = Rs.18, the same £15 million drain now required Rs.270 million to be paid out from the budget, requiring additional revenues of Rs.120 million. The idea of reducing sterling demands on the revenues was never entertained by the rulers. On the contrary, sterling demands rose by one-third over the three decades. To finance this when the rupee was depreciating meant either raising much higher tax revenues in India despite the population being already overtaxed or a larger share of the total budget had to go as drain items under Expenditure in England, exercising a corresponding compression on other normal expenditures. Table 10.1 shows the depreciation of the rupee, slow during the 1870s but speeding up from the middle of the 1880s. For an entire century before that the rupee-sterling exchange rate had been steady at roughly Rs.10 to £1.
So unprecedented was rapid rupee depreciation that it found an echo in English literature of the time. In Oscar Wilde’s comedy The Importance of Being Earnest, first staged in 1895, Cecily’s tutor decides that the violent fall of the rupee was not a subject fit for her sensitive ears. The matter was far from being a joke for Indian taxpayers, however. Table 10.2 shows the additional burden of taxation arising from the combination of rupee depreciation and higher sterling demands on the revenues. It compares actual rupee payments against Council bills and the hypothetical payments, taking as constant the exchange rate that prevailed in 1871-72. This extra burden of taxation amounted to Rs.141 crores, or more than £100 million. Indian public opinion seems to have always agitated for the wrong objective, for rupee depreciation and more exports, seemingly unaware that the higher India’s export surplus earnings were, the greater the benefit to England, and the greater the tax burden on India’s working masses to defray these higher earnings out of the budget. The producers stood to benefit from a higher rupee, which would have obviated some of the increased tax burden on them. The Herschell Committee’s recommendation of closing the mints to free coinage of silver was implemented and did succeed in improving the exchange rate from its nadir of Rs.18 to Rs.15, still a long way below the initial Rs.10.4 (see Table 10.1).
TABLE 10.2: Actual Payments against Council Bills and Estimated Payments with Constant 1871–2 Exchange Rate3
Source: Statistical Abstracts and R. C. Dutt, Economic History of India.
Total central government revenue collections were increased steeply, doubling from Rs.158 crore in 1871 to Rs.317 crore three decades later. Land revenue rose by one-third, but the bulk of increased revenues came from heavier indirect taxes on necessities, including a new tax on salt, even though the government’s salt monopoly meant that its price was already at least seven times greater than it would have been without monopoly. The doubling of total revenues more than met the additional demand by Britain charged to India at the d
epreciating rupee, amounting to Rs.141 crore, as Table 10.2 shows. With such increasing exactions, the 1890s saw deeper agrarian distress and an unusually high incidence of famines.
The only people who did benefit from more exports were the intermediaries (dalals) of the export-import trade, who took a large cut as commission/profit from the amounts paid out to the peasants and artisans from the latter’s taxes. Many Indian business houses had started life as trading agents of the Company in the infamous opium trade to China. They were inclined to bring the dalal viewpoint to the issue of the exchange rate while ignoring the interests of peasant producers. The business leaders, both British and Indian, and professionals were vociferous in opposing any income tax affecting their own interests, while they supported further indirect taxes on necessities like salt, bearing adversely on the poor. Dadabhai Naoroji, in his usual insightful manner, had noticed and regretted this class bias, which was captured by historian S. Bhattacharya: “The members of the British Indian Association urged the Government to increase the salt tax and to reduce or abolish the Income Tax. The Bengal Chamber of Commerce was also of the opinion that the Income Tax might be got rid of by increasing the salt duty.”4
Macroeconomics of the Drain of Wealth
The essence of the internal-cum-external drain as conceptualized by Naoroji and Dutt can be captured by suitably modifying the identity linking the budgetary balance, the external balance, and the savings-investment balance for both colony and metropolis. This has been shown earlier for both colony and metropolis; here we briefly recapitulate the part dealing with the colony.5 The drain can be measured either by looking at that part of the colony’s rupee budget which was set aside for spending outside the country, or, alternatively, by looking at its commodity export surplus, since these earnings covered the items of spending outside the country (assuming that India’s external indebtedness never increased). Either measure would do as a minimal approximation to the actual drain.
