Prof. Utsa Patnaik's novel 'drain theory'.

Utsa Patnaik is Professor Emeritus, Centre for Economic Studies and Planning, Jawaharlal Nehru University
In a recent newspaper article it writes-

How exactly did the British manage to diddle us and drain our wealth’? was the question that Basudev Chatterjee (later editor of a volume in the Towards Freedom project ) had posed to me 50 years ago when we were fellow-students abroad. After decades of research I find that using India’s commodity export surplus as the measure and applying an interest rate of 5%, the total drain from 1765 to 1938, compounded up to 2016, comes to £9.2 trillion; since $4.86 exchanged for £1 those days, this sum equals about $45 trillion.

Wonderful! World GDP was about one trillion when the Raj began and about 4 trillion by 1919 which was when Britain stopped making much of a profit and were breaking even in what is now India.

This Professor is telling us that the British managed to drain India of twenty times more wealth than the entire world was capable of yielding (because of Technological progress, Wealth is now a higher multiple of Income).

How did they manage it? The answer must be that India was not part of this World. It existed in a parallel dimension. Moreover, Britain did not exist entirely in this Universe. So faery Britain drained faery India of faery gold. At least, according to the sort of Economics they teach at JNU.

Let us hear more about this wonderful faery economics.

The exact mechanism of drain, or transfers from India to Britain was quite simple. The key factor was Britain’s control over our taxation revenues combined with control over India’s financial gold and forex earnings from its booming commodity export surplus with the world.

India was a poor country which yielded little tax revenue- no more than ten percent of GDP.
Its 'booming commodity exports' were not controlled by the British. How could it have been?
There was no exchange control back then. Anyone could own unlimited gold or silver or any other sort of financial instrument and use it to finance trade.  When a Gujerati Seth or a Chettiar merchant dealt in cotton or rice or opium there was no formal requirement to do so through British channels. Hawala networks were perfectly legal. Hundis were not regulated in any way. It is a different matter that some transactions were done on 'stamped paper' so as to be more easily justiciable in a British court. But the profit on this was small.

Simply put, Britain used locally raised rupee tax revenues to pay for its net import of goods, a highly abnormal use of budgetary funds not seen in any sovereign country.

India was not sovereign country. It was ruled by British Governors and Judges and Civil Servants and Soldiers. This was an 'invisible export' of Britain's. A calculation similar to Utsa Patnaik's could show that Britain increased Indian wealth by far more than it took. This is because Indian GDP and population did go up in a manner directly linked to the 'invisible' services provided by the Brits.

Some Indians thought such services were too expensive or not fit for purpose. Mahatma Gandhi thought Indians could get on without British law courts and Colleges and so forth. He was wrong. His disciple, Sardar Vallabhai Patel went running to the British Court so as to cheat Netaji Subash Chandra Bose out of a legacy, to be used for a patriotic purpose, that Patel's elder brother had left the Bengali leader. If India did not need the Brits, why did Utsa herself go to Oxford to do her PhD? Why did the Indian Government, after Independence, still spend tax-payer's money on scholarships for people like Utsa?

A sovereign country might hire foreign administrators and soldiers and judges and so forth and pay for them with tax revenue. It is unlikely to do so. Why? Positions of power can yield 'rents'- i.e. more or less opaque, if not corrupt, opportunities for enrichment- and thus the native elite is likely to want to monopolise the top jobs.

The odd thing about the Brits in India- at least after the Crown took over from John Company- is that most natives thought the White Man was less corrupt than one of their own colour. Today, an IAS officer is as likely to be corrupt as not. Amongst ICS officers the thing was exceedingly rare.

The East India Company from 1765 onwards allocated every year up to one-third of Indian budgetary revenues net of collection costs, to buy a large volume of goods for direct import into Britain, far in excess of that country’s own needs. Since tropical goods were highly prized in other cold temperate countries which could never produce them, in effect these free goods represented international purchasing power for Britain which kept a part for its own use and re-exported the balance to other countries in Europe and North America against import of food grains, iron and other goods in which it was deficient.

In other words, John Company extracted rents- often in unconscionable ways- but then so did Native potentates. But the amount of 'rent' sent back home to Blighty was about 3.3 per cent of the GDP of the areas they ruled.

Even with this 'drain', the fact remains that some areas did better under British rule- like pre-Mutiny Delhi. Few did appreciably worse. In a Native State, a clerk might be asked to send his wife to the bed of a superior. That is why people preferred to take employment in British districts.

Why does Utsa thing 're-export' is a form of theft? Transporting things costs money. The Indians had no mercantile navy able to cross great oceans and reach America or Europe. The British bought cheap in India, did some processing back home and then marketed finished products across the globe. This was value-added by British people- not Indians. An Indian merchant- at least after the abolition of the last Navigation Act in 1849- was perfectly free to buy cloves in Zanzibar and process them into clove oil which he could then sell in China or anywhere else. Some Indian merchants did so and, if their luck held, became rich. Many a big business house in India got their start in opium or cotton.

The British historians Phyllis Deane and WA Cole presented an incorrect estimate of Britain’s 18th-19th century trade volume, by leaving out re-exports completely.

This is scarcely surprising. Their book came out in 1962 and conformed to the methodology of the time. In any case, 're-export' involved processing, packaging, marketing, insurance, transport and so forth.

I found that by 1800 Britain’s total trade was 62% higher than their estimate, on applying the correct definition of trade including re-exports, that is used by the United Nations and by all other international organisations.

So what? How things are measured don't affect anything real. What matters is that a metric is applied in a consistent and sensible manner.

When the Crown took over from the Company, from 1861 a clever system was developed under which all of India’s financial gold and forex earnings from its fast-rising commodity export surplus with the world, was intercepted and appropriated by Britain.

Nonsense. Everyone was free to buy gold or currency anywhere and take it anywhere. If you sent a shipment of opium or cotton or tea to a foreign country you could ask to be sent gold or currency or anything else that took your fancy. It may have been safer and cheaper to use British financial intermediaries- but that is still true. That's why some Indian billionaires are based in London.

As before up to a third of India’s rising budgetary revenues was not spent domestically but was set aside as ‘expenditure abroad’.

Sure. There was a 'Home Charge' for pensions and to pay for British 'invisible exports'- including Public Goods like Defense. Pax Brittanica wasn't cheap. Ruling the waves costs a lot of money.

The Secretary of State for India in Council, based in London, invited foreign importers to deposit with him the payment (in gold, sterling and their own currencies) for their net imports from India, and these gold and forex payments disappeared into the yawning maw of the SoS’s account in the Bank of England.

Yawning maw? Did the Secretary of State- like a notorious Nigerian Petroleum Minister- put the money into his own pocket? No. The account was properly audited and all monies were used for a proper purpose. How come? The Opposition Party in Parliament would have seized upon any evidence of malfeasance to bring down the Ministry.

Against India’s net foreign earnings he issued bills, termed Council bills (CBs), to an equivalent rupee value. The rate (between gold-linked sterling and silver rupee) at which the bills were issued, was carefully adjusted to the last farthing, so that foreigners would never find it more profitable to ship financial gold as payment directly to Indians, compared to using the CB route.

In other words, there was no 'yawning maw' and no rent extraction. Arbitrage was unrestricted. Thus a useful economic service was provided in return for a small mark up.

Foreign importers then sent the CBs by post or by telegraph to the export houses in India, that via the exchange banks were paid out of the budgeted provision of sums under ‘expenditure abroad’, and the exporters in turn paid the producers (peasants and artisans) from whom they sourced the goods.

What's wrong with that? If the SoS got greedy the market would disintermediate him. There was no law against shipping gold or silver or currency to India or from it.

The United Nations (1962) historical data for 1900 to 1960, show that for three decades up to 1928 (and very likely earlier too) India posted the second highest merchandise export surplus in the world, with USA in the first position.

So what? It is the level of exports, not the surplus or deficit, which matters. India (excluding Burma) was stagnating which is why Egypt in 1910 was attracting more f.d.i. than the whole of India.

Not only were Indians deprived of every bit of the enormous international purchasing power they had earned over 175 years

Every bit? Did India import no visibles at all? No doubt, Railway engines and Telegraph equipment just grew on trees.

even its rupee equivalent was not issued to them since not even the colonial government was credited with any part of India’s net gold and forex earnings against which it could issue rupees.

OMG, I've just discovered my Bank is robbing me! I put in my salary check every month and they just eat the whole thing- those greedy bastards! I just checked my account. It shows I can't afford even the pizza I was about to order. Twenty years I've been putting my salary into that Bank and they have frittered away every penny!

The sleight-of-hand employed, namely ‘paying’ producers out of their own taxes, made India’s export surplus unrequited and constituted a tax-financed drain to the metropolis, as had been correctly pointed out by those highly insightful classical writers, Dadabhai Naoroji and RC Dutt.

Very true. But this malpractice continued after Independence. My Daddy paid Income Tax to the Indian Government. They used this money to pay his salary. Thus he was actually working for free! All those young people eager to get into the IAS are utter fools. Government will use their own money to pay them. They should simply cut out the middleman and pay themselves to sit at home.

Naoroji had no impact as a British MP because even the unlettered voters of the East End understood that India was getting something in return for the money it paid the British. It was getting law and order and seas free of pirates and roads free of thugee. His famous 'knife of sugar' speech disappointed his Fenian supporters. They thought British landlords were rack-renting their Indian estates and getting coolies whipped on their plantations. Naoroji was saying this wasn't the case. Everything was sweet and legal- it's just the people kept getting poorer all the same. But the reason for that was obvious. Malthusian pressure giving rise to Ricardian rents. The technological backwardness of the Indians prevented them industrializng rapidly. Thus the 'White Man's burden' was to lift up his backward 'Aryan brother'.

If one looks at Hansard, one sees that debates on India featured die-hard Tories, who had quit that country forty or fifty years previously, gassing on about how the Indian village was a Utopia where the strong helped the weak and adherence to ancient ways ensured bountiful harvests. This was similar to Gandhian stupidity. The younger Liberals who had returned more recently from India explained that the Indian village was no different from the English village. The strong sought to acquire the land and labor of the weak. The old ways were unproductive. The guy with the capital and know-how to employ new techniques could soon swallow up the holdings of his fellows. Thus the Indian hinterland was not self-regulating. There could be massive famines or displacements of people unless the Administration was pro-active. A Night Watchman State might preside over demographic collapse.

Progressive Civil Servants like Hulme, Wedderburn & Cotton started the Indian National Congress so that people like Naoroji & Gokhale could explain that India needed smarter, better, Governance. Unfortunately, the INC turned against this sensible program under the influence of either the Mahatma or Marx or some other such Moonshine.

Indian Economists contributed greatly to this outcome. Consider what this "Professor Emeritus' says next-

Surplus budgets to effect such heavy tax-financed transfers had a severe employment–reducing and income-deflating effect: mass consumption was squeezed in order to release export goods.

This idiot is assuming India exhibited price and wage stickiness during the period. What actually happened was that silver continually devalued and only silver mattered as far as domestic prices and wages were concerned. Thus no Keynesian argument can apply. Indeed, that's why Ambedkar stopped banging on about Monetary policy. Returning to India, he saw it was irrelevant. It was a different matter that the low marginal efficiency of Capital (which Marshall had already predicted on the basis of the short-termism and lack of scientific education of the mercantile castes) meant India reverted to being the 'sink of gold' with a vengeance. Later, it took the genius of Morarji Desai to ensure that India subsidized the Gulf. Gold smuggling was a riskless way to double your money. The young Darius Guppy, Boris Johnson's chum from School, began his criminal career in partnership with the son of an Indian judge who'd been to Winchester School. Darius was amazed at how easy and safe and hugely profitable it was to smuggle gold into India.

The reason the Brits were able to turn a profit on running India was that they opened up wholly new markets for Indian agriculturists- that's what 'released export goods', many of which did not previously exist on Indian soil, or which could not previously be transported over any great distance- but the profits went to middlemen. No doubt, the Brits charged through the nose for its invisible exports to do with Shipping, Railways, Law & Order and so forth. But Indians were welcome to try to produce these things more cheaply themselves and thus to disintermediate the Brits. That was what the Mahatma was trying to do with his notion of 'swadeshi' and economic 'swaraj'. But Gandhi failed miserably. Why? Shite economists- like Kumarappa- wanted to prove the Brits had got rich only by robbing Indians. Clearly, only if Indians stopped doing anything productive and just starved to death would the Brits take the hint and leave.

Per capita annual foodgrains absorption in British India declined from 210 kg. during the period 1904-09, to 157 kg. during 1937-41, and to only 137 kg by 1946. If even a part of its enormous foreign earnings had been credited to it and not entirely siphoned off,

Lots of Indians were siphoning off money. What was stopping the Princes and Zamindars from feeding their people instead of buying Rolls Royce cars? Land Revenue declined in importance while the provision of Law & Order improved. This did yield a surplus for the British but it became too small for the British Parliament to get fussed about. Nobody was getting very rich off it. By contrast, the Indian middleman, more often than not, was a parasite pure and simple.

How did the Tatas make their money? Shipping opium to the Chinese and then taking advantage of the American Civil War to speculate in cotton.  What about the Marwaris and the Chettiars and so forth? All were enriched by exports and imports. They weren't landowners.  How else could they have gained such wealth?

India could have pursued an 'export led' growth strategy after Independence. It chose to do the opposite. As a result per capita food consumption declined. In parts of India, the average height and weight decreased noticeably reaching a trough in the late Sixties.

India could have imported modern technology to build up an industrial structure as Japan was doing.

India did import modern technology- railways, telegraph etc before Japan did. Instead of following Mahatmas or Marxist nutjobs, it could have grown wealthy the way other countries did- viz. by producing and selling useful stuff. Instead, it went in for the begging bowl and continual whining about how ruthless exploitation by all and sundry had made Indians unfit for any useful work.

Instead the masses suffered severe nutritional decline and independent India inherited a festering problem of unemployment and poverty.

Why? A poor guy will work cheap. If you have a lot of poor people, you can get them making stuff cheaper than other countries can. Then you export that stuff and buy nice things. India decided buying nice things was wicked. So was doing anything sensible. Instead, one must prove that Britain drained India of twenty times more Wealth than actually existed on the Globe. They did this very cunningly using exactly the same tactics that my Bank uses to steal my salary check every month. Hai! Hai! When will this looting end! Won't someone think of the children!