The colonial drain of wealth

Rashed Rahman

Prabhat and Utsa Patnaik are reputed Marxist intellectuals with a body of work that has enlightened successive generations on imperialism, colonialism, socialism, etc. Those who know them and know their work (amongst whom I claim a place based on an all-too brief acquaintance when they were at Cambridge University pursuing their PhDs and I was a student activist in London in the late 1960s-early 1970s) will therefore be delighted to hear that they have just published a seminal work on the colonial drain of wealth from the Subcontinent that reduced it from the prosperous envy of the world to penury, poverty, famine and crises from which it has still to fully recover.

In their new book Capital and Imperialism: Theory, History, and the Present (Monthly Review Press, 2021), they deal with this issue as well as theoretical insights to understand the global capitalist system as it has evolved into its present avatar. A tantalising glimpse into the content of this publication is provided by an article they have written in Monthly Review (February, 2021), based on Chapter nine of the book and titled “The Drain of Wealth: Colonialism before the First World War”. Tantalising because of the depth and analytical rigour they bring to an explanation of how British colonialism not only stripped the Subcontinent of its wealth, reducing it to crippling poverty, but also because it promises a wealth of knowledge and understanding of the world today that is so sorely needed. And this in spite of the sometimes daunting economic arguments, although they are presented as best as possible for the non-specialist general reader.

A very pertinent argument at the heart of the Patnaiks’ thesis is the ‘reminder’ that the appropriation and drain of economic surplus from the colonies by western powers (especially Britain) materially and substantially aided their industrial transition (or revolution) from the 18^th century onwards. This drain also fed into the diffusion of capitalism to the regions of new European settlement, particularly the Americas, Africa, and Australasia. The authors take to task the failure of mainstream (bourgeois) economic literature to acknowledge this fact, its sheer scale, or the specific, real financial mechanisms through which such transfers were affected. They quote the works of such eminent economic historians/analysts as Dadabhai Naoroji, Romesh Chunder Dutt, A K Bagchi, A K Bannerjee, D Bannerjee, et al, to delineate both the scale and mechanics of this drain from the Subcontinent. They also do not forget to mention the exceptions in the economic literature who contradict the accepted view that the Industrial Revolution in western countries was based on a purely internal dynamic. Amongst this critical school can be found such eminent names as Paul A Baran, Maddison, etc. The mainstream (bourgeois) economic wisdom even included some who flew in the face of the facts to suggest that the colonies were a burden on the metropolis, which arguably would have been better off without them.

In the Subcontinent, the East India Company and later the British Empire used up to one-third of total rupee tax revenues to acquire goods and export these to earn gold and foreign exchange from the rest of the world. These earnings did not accrue to their country of origin, i.e. the Subcontinent, but were appropriated by British colonialism. In addition to the boost to industrialisation at home, by the last quarter of the 19^th century, Britain’s large-scale capital exports using the colonies’ export surplus earnings hastened the industrialisation of Europe and the new settler colonies in the Americas, Africa, Australasia, etc.

On the other side of this picture of growing wealth and prosperity for the colonisers, the people of the colonies suffered a declining per capita food availability and pauperisation. The Subcontinent suffered repeated large-scale famines as a result.

The drain of wealth had both an internal (to the Subcontinent) and an external dimension. Internally, British colonialism instituted the extraction of economic surplus through rents and taxes in cash. Land revenue formed the bulk of these taxes. Independent producers paid land revenue directly to the state while cultivating tenants paid rent to the landowner, who in turn paid land revenue to the state. Other important sources of revenue included the opium trade (used to such devastating and tragic effect for the subjugation of China) and the salt (colonial) monopoly.

The external dimension consisted of ‘clever accounting’, whereby a substantial part of the tax revenues were designated as ‘expenditure abroad’ in the budget, and instead of being used to reimburse the producers for the export surplus with the rest of the world, were kept in London. Thus the Subcontinent’s export surplus was siphoned off for the British colonial power’s own pocket. The state budget was used to pay the producers of the export surplus out of their own tax contributions, while the international proceeds of the commodity export surplus were never credited to the country of origin, i.e. the Subcontinent. Part of the colonial exports were paid for through the imports of British manufactures, mainly textiles. These imports arose from keeping the colony’s economic trade liberalised. These imported goods were absorbed at the expense of displacing (ruining) local artisan spinners, weavers, etc, whereas the metropolis practiced protectionism against colonial manufactures for more than a century. From 1700, Britain imposed an official ban on consumption of textiles from Asia within Britain, while re-exporting them to the rest of the world.

After deducting the virtually compulsory imports, the resulting export surplus earnings were not paid to the producers in a regular manner because they were paid out of tax revenue raised within the Subcontinent. The overwhelming bulk of such taxes were extracted from the very same producers as rent, land revenue and indirect taxes, especially the salt monopoly. This meant producers were actually taxed out of their goods while appearing to be paid.

The East India Company’s trade monopoly was granted by the British parliament in 1600. The Company had to pay for its import surplus from Asia with silver, arousing the ire of some early mercantilists. The Company acquired tax revenue collecting rights in Bengal in 1765 (following the decisive victory at Plassey in 1757), and the substantive drain of wealth starts from that date. Some drain was already in place through the underpayment for goods using coercion against petty producers, but this was nothing compared to the bonanza after 1765 when the free acquisition of export goods using local taxes started. Bengal’s population at that time was 30 million, four times that of Britain. The rapacity of the Company, with forcibly trebled revenue collection over five years, decimated one-third of the population in the great 1770 famine. Full recovery had not yet been attained by 1792, yet the land revenue was fixed under the Permanent Settlement in Bengal that year, which exceeded the British government’s taxes from land in Britain. Over the next 80 years (to 1872), revenue collections trebled as the Company, using Bengal as its economic base, acquired control over Bombay Deccan, Madras, Punjab and Awadh.

Despite three resistance wars by the Burmese, fertile lower Burma (today’s Myanmar) was occupied by 1856 and the entire country by 1885. As in the Subcontinent, a land revenue collection system was promptly put in place, with the new office installed of the ‘Collector’.

Britain saw a steadily increasing, completely cost-free inflow of tax-financed commodities such as textiles (up to the 1840s), rice, saltpetre (potassium nitrate), indigo, raw cotton, jute, etc, far exceeding Britain’s own requirements. The excess was re-exported to other countries. Britain’s trade deficit with the Subcontinent did not create any external liability for Britain up to 1765. After that, when local tax collection began, goods were obtained for free as the commodity equivalent of the economic surplus extracted as taxes. This constituted the essence of the drain of wealth.

Between one-quarter and one-third of annual tax revenues were used for the purchase of export goods, cotton textiles constituting a major part of this enterprise until the 1840s. The ban on the Subcontinent’s cotton textiles was a protectionist measure that gave British manufacturers a monopoly of the domestic market. In 1833, the East India Company’s monopoly of Subcontinental and Chinese trade ended on demands from English manufacturers who, after displacing Subcontinental textiles from European markets, wanted free access to the Subcontinent’s market.

Although the East India Company’s rule ended as a consequence of the 1857-9 War of Independence, the drain of wealth continued under the Empire. In fact, Britain’s further imperial wars of conquest were paid for from that very drain.

This brief (and wholly inadequate) rendering of Prabhat and Utsa Patnaik’s work leads us to the irresistible conclusion that Britain enjoyed a ‘free lunch’ from the drain on wealth from the Subcontinent since the 18^th century and this bonanza fed into the Industrial Revolution in Britain (and later the west entire) and also helped finance the expansion of the British Empire.