British Raj siphoned out $45 trillion from India: Utsa Patnaik

When renowned economist Utsa Patnaik began to sift through old tracts of British economic history in order to understand the nature of fiscal relations between London and colonial India, the fate of the Kohinoor wasn’t much in the news; Shashi Tharoor hadn’t yet spoken in favour of reparations at Oxford University—a speech which went viral; and not many books had been written about the thousands of Indian soldiers who fought under the British flag in the empire’s many wars overseas.

While the past few years have shed additional light on the colonial experience, there is much that we still do not know. For example, how much money was really taken out of India? In a collection of essays published recently by Columbia University Press, Patnaik attempts to make a comprehensive estimate. Over roughly 200 years, the East India Company and the British Raj siphoned out at least £9.2 trillion (or $44.6 trillion; since the exchange rate was $4.8 per pound sterling during much of the colonial period).

To put that sum in context, Britain’s 2018 GDP estimate—a measure of annual economic output—is about $3 trillion. In the colonial era, most of India’s sizeable foreign exchange earnings went straight to London—severely hampering the country’s ability to import machinery and technology in order to embark on a modernisation path similar to what Japan did in the 1870s. The scars of colonialism still remain, Patnaik says. And yet, in an India where historical slights are endlessly litigated and towns are arbitrarily renamed, an adequate accounting of the enduring burden of colonialism is perhaps yet to be undertaken. Excerpts from an interview:

 

In a recent paper, you suggest Britain drained out nearly $45 trillion of wealth from India. Could you put that quantum of money in perspective and what difference it would have made to the Indian economy?

Between 1765 and 1938, the drain amounted to £9.2 trillion (equal to $45 trillion), taking India’s export surplus earnings as the measure, and compounding it at a 5% rate of interest. Indians were never credited with their own gold and forex earnings. Instead, the local producers here were ‘paid’ the rupee equivalent out of the budget—something you’d never find in any independent country. The ‘drain’ varied between 26–36% of the central government budget. It would obviously have made an enormous difference if India’s huge international earnings had been retained within the country. India would have been far more developed, with much better health and social welfare indicators. There was virtually no increase in per capita income between 1900 and 1946, even though India registered the second largest export surplus earnings in the world for three decades before 1929.

Since all the earnings were taken by Britain, such stagnation is not surprising. Ordinary people died like flies owing to under-nutrition and disease. It is shocking that Indian expectation of life at birth was just 22 years in 1911. The most telling index, however, is foodgrain availability. Because the purchasing power of ordinary Indians was being squeezed by high taxes, the per capita annual consumption of foodgrains went down from 200 kg in 1900 to 157 kg on the eve of World War II, and further plummeted to 137 kg by 1946. No country in the world today, not even the least developed, is anywhere near the position India was in 1946.

What was the system in place to orchestrate this drain of wealth? Why wasn’t there any large-scale local opposition to it?

All the colonising powers put in place tax collection systems. The very name for the district administrator was ‘Collector’. When the Company first got revenue collecting rights in Bengal in 1765, its employees went completely mad with avarice. R.C. Dutt, a civil service officer in the British Raj, documented that between 1765 and 1770, the Company trebled the tax revenue in Bengal, compared to the erstwhile Nawab’s regime. You know what that means for a peasant who is already quite poor? The Nawab was collecting sufficiently high taxes, so when the Company took over and forcibly trebled collections over five years, people were driven into starvation. There was a massive famine in Bengal in 1770. Out of a population of 30 million, the British themselves estimated that 10 million died.

From 1765 up to the takeover by the Crown, the Company was using a quarter to a third of net revenue collections to purchase export goods from the peasants. This was an abnormal use of taxes and the peasants themselves did not know they were getting diddled. If the same Company agent who collected the producer’s tax had at the same time bought his goods out of that tax, then the producer himself would have said: dal mein kuch to kala hai (something fishy is going on here). But the Company agent who bought produce out of the tax money was a different person and did so at a different time from the Company agent who collected the tax. So, the producers did not connect the two.

The market is an amazing thing: it obscures real relationships. A large part of the producer’s own tax payment simply got converted into export goods, so the Company got these goods completely free. The later mechanism after the Crown took over was a further development using bills of exchange. The only Indian beneficiaries of this clever, unfair system of linking trade with taxes were the intermediaries or dalals. Some of modern India’s well-known business houses made their early profits doing dalali for the British. Income tax on businesses and professionals was virtually non-existent until WWII.

What happened to the money that was drained out of India? What was it used for?

The modern capitalist world would not exist without colonialism and the drain. During Britain’s industrial transition, 1780 to 1820, the drain from Asia and the West Indies combined was about 6 percent of Britain’s GDP, nearly the same as its own savings rate. After the mid-19th century, Britain was running current account deficits with Continental Europe and North America, and at the same time, it was investing massively in these regions, which meant running capital account deficits too. The two deficits summed to large and rising balance of payments (BoP) deficits with these regions.

How was it possible for Britain to export so much capital—which went into building railways, roads and factories in the US and continental Europe? Its BoP deficits with these regions were being settled by appropriating the financial gold and forex earned by the colonies, especially India. Every unusual expense like war was also put on the Indian budget, and whatever India was not able to meet through its annual exchange earnings was shown as its indebtedness, on which interest accumulated.

As under the Company, under the Crown too, a third of India’s budgetary revenues was not spent domestically but was set aside as ‘expenditure abroad’. The secretary of state (SoS) for India, based in London, invited foreign importers to deposit with him the payment (in gold and sterling) for their net imports from India, which disappeared into the SoS’s account in the Bank of England. Against these Indian earnings he issued bills, termed Council Bills (CBs), to an equivalent rupee value—which was paid out of the budget, from the part called ‘expenditure abroad’. So, Britain had complete command over all the international purchasing power that Indian producers had earned. Even if a part of it had been credited to India, we could have imported modern technology and started industrialising long before Japan did under the Meiji restoration in the 1870s.

The world has changed considerably since the 19th century and China’s recent foray into Africa is sometimes referred to as new age imperialism . . .

It would be quite incorrect to call either Chinese or for that matter Indian entrepreneurs in Africa as modern imperialists. This is a ploy that the North uses to deflect attention from the crimes that they committed against our people, after getting forcible political control. Britain and other countries taxed the colonised, took their foreign earnings, and drove them into hunger.

Chinese and Indian entrepreneurs in Africa are merely trying to do business in agreement with independent governments. We can never hope to replicate the development path that Northern countries followed. They dealt with rural displacement and rising unemployment through massive, permanent out-migration, mainly to the Americas. That option is not open to labour-surplus India or China. We need to develop an industrialisation strategy that preserves employment and livelihoods.

As trade barriers are once again going up, which is reminiscent of the British empire’s policy on Indian cloth imports, are there any lessons India can learn on this front from the colonial experience?

The lesson we have to learn is to disengage. I am not unhappy at the idea of protectionism in the West. Because, frankly, we have to turn our eyes inward. We have an enormous domestic market and its purchasing capacity needs to be raised. We must trade more with other developing countries. And trade on terms which are not exploitative—essentially what is called fair trade. The developing world must start thinking in terms of cooperative solutions. Some barriers to trade with the Northern countries is also essential, because the dogma of ‘free trade’ was promoted by them to serve their own interests at our expense.

Transnational companies are trying to change our cropping patterns towards export crops, as they did during the colonial period. They want free access to our agriculture, because they cannot ever produce the crops we can, particularly in winter. The new globalisation is all about the North accessing fresh fruits and flowers from the South in the middle of winter. Tropical countries should be banding together in order to use the year-round productivity of their lands as a bargaining chip to obtain better terms of trade for their farmers. Today’s advanced world population, to this day, is highly dependent on the ex-colonial world for its standard of living. Nearly 70% of the 12,000 items sold in a modern supermarket in the West has a tropical import content.

The terms of trade are still not fair. Yet, many still adhere to the belief that the advanced countries became advanced because they are terribly innovative and entrepreneurial. Very little of real history is taught to either Indian or British students. In the Cambridge Economic History of India, for example, there is not a single word on the stringent protectionist policy against Asian textiles that Britain maintained from 1700 to 1846. Nor is there a single word on Britain’s appropriation of India’s entire export surplus earnings for 180 long years from 1765 to 1945.

While independent India maintains cordial relations with Britain, there has been much political tumult of late with regard to Mughal history. Both the Raj and the Mughals are regarded as outsiders. How do they compare?

The Mughals did come from outside, but then, waves of migration have always come from outside. What the Mughals did was exactly what the Rajasthan princes also did. They taxed the people, but in moderation, and spent all taxes within the country. They settled here and did not retain any permanent ties with their places of origin. Clearly, the Mughals can in no way be equated with the British because there was no export drive, no cheating of local producers, and no tax-financed annual drain out of the sub-continent.

As an economist interested in history, what is your view on the idea of reparations? Should Britain return the large sums of money that you suggest it drained out of India?

Not only Britain, but the whole of today’s advanced capitalist world flourished on the drain from India and other colonies. Britain was too small to absorb the entire drain from colonial India. So it became the world’s largest capital exporter, which aided the industrial development of Continental Europe, the US, and even Russia. The infrastructure boom in these countries would not have been possible otherwise.

Colonial drain helped to create the modern capitalist world, from North America to Australia—all regions where European populations had settled. The advanced capitalist world should set aside a portion of its GDP for unqualified annual transfers to developing countries, especially to the poorest amongst them. Britain, in particular, morally owes reparations for the 3 million civilians who died in the Bengal famine because it was an engineered famine.

 

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