by Utsa Patnaik
Northern populations in cold temperate Europe could not then, or for that matter in present times, ever “import-substitute” in these goods, and for that very reason they prized them, developing an increasing appetite for them. Conversely, there was no particular good from temperate lands that the tropical countries wished to import in any substantial way, since they could produce all their traditional requirements. They produced at least two crops a year, while single cropping was imposed by climate in cold temperate lands; the larger countries in the South could produce in winter all of the temperate land crops, in addition to tropical crops in their monsoon season. The Chinese emperor Qianlong, responding to George III, who had sent an envoy to negotiate trade concessions, famously wrote “our Celestial Empire possesses all things in prolific abundance and lacks no product within its own borders.”18
This important material reality of asymmetric production capacities, which explains the historic drive by European countries to subjugate tropical areas and force them to trade at gunpoint, was not only ignored by David Ricardo, but was explicitly assumed away by him.
Ricardo assumed in his model of comparative advantage that “both countries produce both goods”—indeed his assumption was that “all countries produce all goods”—while showing that specialization and exchange according to comparative cost advantage led to mutual benefit. The material fact was ignored that unit cost of production could not be defined for tropical goods in the cold temperate European countries where the output of such goods was, and always will be, zero and hence absolute cost was not definable, let alone comparative cost advantage. The supply from domestic sources of a large range of goods was zero at any price, and this continues to be the case at present. Ricardo’s theory contained a simple material fallacy, the “converse fallacy of accident,” wherein a special case is assumed (both countries produce both goods) and is used to draw an inference (trade is mutually beneficial) that is then improperly applied to cases where the assumption is not true.19 Since Ricardo’s basic assumption was not true, the inference of mutual benefit did not follow. On the contrary, historical evidence shows that the less powerful country, obliged to specialize in export crops, loses out through area diversion (since augmenting cropped area needs state investment, which is not forthcoming), leading to falling domestic food grains output. It also sees a decline of domestic manufacturing output and an increase in unemployment when it is kept compulsorily open to imports of manufactures, since there is little unused land to absorb those thrown out of work.20
Compared to the demand for Britain’s own goods, tropical goods were demanded by Northern populations, to a greater extent given the permanent non-availability of these goods from domestic sources; and the demand was more income-elastic. Re-exports of a substantial part of its total imports boosted the purchasing power of Britain’s domestic exports by 55 percent during the period 1765 to 1821.21 Four-fifths of goods re-exported by Britain were from tropical regions, and the re-exports went mainly to Continental Europe. The Netherlands’ re-exports of imported goods exceeded exports of its domestically produced goods in the eighteenth century.22 Thus there was a double benefit from the “drain”: not only did the metropolis get prized tropical goods free for its own use but also got them free to exchange for temperate land products in which it was deficient.
Asia, West Indies, and Ireland, taken together, accounted for half of all British imports during the period 1784 to 1826. The total transfer, measured by the import surplus into Britain from its tropical colonies in Asia and West Indies (which embodied taxes and slave rent, and hence created no external liability), ranged from 5.3 to 6.1 percent of Britain’s GDP from 1801 to 1821.23 The data in Davis24 similarly show that the combined deficit of Britain with these colonies ranged from 4 to 6 percent of its GDP during most triennia between 1784–86 and 1824–26.25
We can arrive at a rough estimate of the drain from India for the period 1765 to 1836 by using trade data for Britain. The time-series from 1765 to 1822 in Mitchell and Deane and price indices in Imlah,26 had been used earlier to estimate the import surplus into Britain from Asia as the measure of drain. Using the data from Davis, we bring the estimate up to 1836, after deducting the value of the China trade.27
The current value import surplus for 1765 to 1836 is found to total £270.254 million.28 We can calculate the present value of the drain by bringing forward the estimate of each year’s drain at a certain interest rate up to any recent date and then adding up the individual figures. However, we adopt a short-cut procedure that is slightly different. We bring the total drain amount up to the present at 5 percent interest rate from the midpoint of the period. And we do so up to a) the time of Independence in 1947 and b) the present year of 2020. Compounding at a low 5 percent interest rate from the midpoint of the period, which is 1800, and including that year, we find the sum amounts to a) £369.65 billion until Independence; and to b) £12,400 billion until 2020. We will come back to these figures in the last section. Taking the midpoint of the total drain period as the initial year understates the estimate we would get from a proper compounding of each year’s figure to the terminal year.29
An acute observer, Montgomery Martin, in his 1838 book and while giving evidence to a Select Committee in 1840, deplored the drain on India. Taking the £3 million annual Home Charges as its measure, he applied the prevalent 12 percent interest rate and calculated its total value as £724 million for the three-decade period up to 1833.30 He pointed out that taking the annual drain, which was slightly in excess of £2 million over the previous fifty years, and applying the same interest rate, gave “the enormous sum” of £8,400 million. “So constant and accumulating a drain even on England would soon impoverish her; how severe then must be its effects on India, where the wages of a labourer is from two pence to three pence a day?”31
Appropriating the Colonies’ Global Exchange Earnings
In 1833, the East India Company’s monopoly of Indian and Chinese trade finally ended, owing to demands from English manufacturers, who, after displacing Indian textiles from European markets, wanted free access to the Indian market. However, the Company continued to rule until the Great Rebellion of 1857–59. India’s exports to Britain declined, deindustrializing imports of yarn and cloth from Britain grew fast, and by the late 1840s, India’s trade with that country registered a deficit. But Indian exports to the world continued to rise and far exceeded the new deficit with Britain, so that an overall rising merchandise export surplus was always maintained (see Table 9.132 and Figure 9.1). This remained a large positive figure even after deducting the import of commodity gold.
The ensuing problem of what Irfan Habib calls “the realization of the tribute” was solved for the time being by promoting India’s exports to countries with which Britain ran trade deficits.33 The drive to expand opium exports to China where the trade was illegal, and to forcibly open up its ports in the Opium Wars, was part of the process of promoting triangular trade patterns. In India, local peasants were coerced under state monopoly into growing opium for a very low price, and the silver tael proceeds of the Company’s opium exports to China (via private shippers) were used to offset Britain’s deficits with China.
TABLE 9.1: India’s Merchandise Export Surplus with the World, 1833–1940 in Current Prices in Rs. Crore (1 Crore = 10 million)
Source: K. N. Chaudhuri, “Foreign Trade and Balance of Payments 1757–1947,” in D. Kumar, ed. (with the editorial assistance of Meghnad Desai), The Cambridge Economic History of India, Volume II c.1757–c.1970 (Delhi: Orient Longman, in association with Cambridge University Press, 1984).
Gross revenue collections had trebled by the 1820s compared to the 1800s, as the Bombay Deccan and Madras were brought under land revenue settlements and the salt and opium monopolies yielded more revenues. The drain increased, but it was now carried out in a more roundabout manner than the earlier direct merchandise export surplus with Britain, since that direct surplus had turned into a deficit.
&n
bsp; A more general solution had to be found to this problem of “realizing” the tribute. The solution came into effect in 1861 after India’s governance had passed to the Crown. It was simple and effective: the Secretary of State for India in Council (a minister of the British government based in London) invited foreign importers of Indian goods to deposit with him gold, sterling, and their own currencies, as payment for their imports from India, against the issue of an official bill of exchange to an equivalent rupee value cashable in India. The exchange rate (rupee relative to sterling, the latter being fixed with respect to gold) at which these Council bills were sold was periodically adjusted carefully to a fraction of a farthing, so that foreign importers would never find it cheaper to send gold as payment directly to Indian exporters, incurring the relevant transport cost, even when that gold might come from Egypt or Australia, compared to using the London Council bill route. The exchange rate was thus administered to vary between “gold points” adjusted to prevent the import of financial gold into India (and also to prevent its export, except when required by the metropolis). Foreign importers of Indian goods tended to prefer Council bills to any other private mode of remittance because they could be certain that the bills would always be honored, since they were issued by a minister of the British government, which meant a sovereign guarantee against default.
Figure 9.1: India’s Merchandise Export Surplus, 1833–1919
Source: Table 9.1.
The Council bills could be cashed only in rupees and the exporters in India who received the bills (by post or by telegraph) from foreign importers, on submitting them through the exchange banks, were paid by the Indian Treasury out of budgetary funds already set aside for the purpose as expenditure incurred abroad.34 Exporters in turn paid the producers from whom they sourced the goods. Thus the essential feature of earlier drain was retained—producers were apparently paid but not actually paid for their export surplus because the payment came out of taxes raised in major part from the very same producers. The export surplus continued to be merely the commodity form of tax revenues.
However, the scope of this official mechanism was wider than that under the Company, in that the total export surplus earnings of British India from the entire world was appropriated. Internal redistribution of incomes also took place from the producing classes to the trading classes under this mechanism of transfer, since the export agents took a fairly large cut out of the producer’s price, so that a given value of drain to Britain entailed an even larger squeeze on producers’ incomes.
The total (£428.58 million) of commodity export surplus earnings over the period 1871 to 1901 was identical with the total expenditure in England charged to Indian revenues (£428.93), as Table 9.2 shows. It is important to note that this surplus, defrayed through Council bills, is the balance of merchandise trade plus the balance of commodity gold flows. Additional financial gold flows also occurred that belong in the capital account. Figure 9.2, depicting these two series, makes clear that India’s export surplus earnings fluctuated greatly depending on internal factors and on world market conditions, but the sterling expenditure by England using these earnings rose much more steadily. This was because, to deal with fluctuations of trade, a form of buffer-stock operation with regard to currency was carried out, of sterling in England and of rupees in India. If India’s net external earnings rose sharply in a particular year, in excess of spending required by England, then the sterling balances maintained by the Secretary of State were added to, being drawn down in other years when the opposite situation prevailed. In such a case of sharp rise in external earnings, at the Indian end there would be an unusually large value of Council bills tendered and thus excess demand for rupees, so in addition to the bulk of the planned payment of the bills out of the budget, the paper currency reserve (and more rarely the gold standard reserve) at the margin would be drawn down, being replenished in other years of a decline of India’s external earnings and hence slackening of demand for rupees.
TABLE 9.2: India’s Commodity Export Surplus (Value of Council Bills) and Expenditure in England, 1871–1901 (£ million)
Sources: Statistical Abstracts for British India, various years (Departm ent of Commereiai Intelligence and Statistics, India); and R. C. Dutt, Economic History of India, Vol. II.
The new arrangement that operated from 1861 thus retained the basic feature of the earlier direct system under the Company: the merchandise export surplus continued to be “paid” to its colonized producers out of their own taxes, and hence was not paid for at all. It continued to be obtained gratis by the metropolis, with the global earnings from it, the gold and foreign exchange, being retained by the metropolis.
A small amount of financial gold as payment by foreigners for India’s exports may have evaded this system of economic control and reached India, perhaps through the ports in the princely states. But this is likely to have been negligible and is impossible to estimate. The overwhelming bulk of the rest of the world’s payments for India’s commodity export surplus was successfully intercepted and appropriated by the metropolis and never permitted to reach the colonized producers who had earned it, either as physical gold for financial payment purposes (as opposed to commodity gold, imported like any other good), or as foreign exchange denoted as a net credit for India. Not even the colonial government was credited with any part of India’s external earnings against which it could issue rupees, as would happen in a sovereign country. On the contrary, the Secretary of State in London had an official claim on the part of the Indian budget designated as Expenditure in England or sometimes as Expenditure Abroad. Issue of the rupee value of the entire external earnings out of this part of the budget, was not only income-deflating but also made for monetary stringency, lack of liquidity, and hence perpetually high interest rates.
Figure 9.2: India’s Commodity Export Surplus (Value of Council Bills) and Expenditure in England, 1871-1901
Source: Data series in Table 9.2
In accounting terms, India’s large and rising commodity export surplus was shown as completely offset by the state-administered invisible debits (the tribute) which included all the rupee drain items of the budget, now expressed in sterling on the external account. But the administered, manipulated debits were not necessarily confined to the recurring drain items alone.
For the period 1837–38 to 1900-01, we estimate the drain as £ 596.757 million, by taking the series of “expenditure abroad” in the Indian budget that was paid out; from 1861 this was against Council bills tendered to the value of India’s commodity export surplus. This data series is available in both sterling and in rupees from the Statistical Abstracts for British India. The midpoint of this period is 1868; cumulating as before at 5 percent interest rate for the seventy-nine years to 1947, and the 152 years to 2020, we obtain the total value of the drain by these dates as £28.17 billion and £992.14 billon, respectively. Adding these estimates to our estimate for the earlier period 1765 to 1836, we obtain the figures in Table 9.3.
For an idea of the relative importance of the drain, the Gross Domestic Product of the United Kingdom in current prices for the dates 1836, 1900, and 1947 are also given. The value of the drain during 1765 to 1900, cumulated to 1947, gives us £397.8 billion, nearly thirty-eight times the 1947 GDP of the UK. Since nominal values are used here, with no adjustment for price change, the value of the drain up to 1900 would be a much higher multiple of the UK’s 1947 GDP when this is expressed in constant 1900 prices. Cumulated up to 2020, the drain amounts to £13.39 trillion, over four times the UK’s estimated GDP for that year.
Over most of the period, the exchange rate of the U.S. dollar against sterling was, at best, £1= $4.84. Thus, the drain for 1765 to 1900 cumulated to 1947 in dollar terms is $1.925 trillion, and cumulated up to 2020, $ 64.82 trillion. The former figure is greater than the combined 1947 GDP of the United Kingdom, the United States, and Canada. The latter figure is similarly much higher than the combined 2020 GDP of these countries.
Imposition of Sterling Indebtedness
Our estimates are minimal estimates, and they are by no means a full measure of the actual sums coming from India for Britain’s benefit. Over a run of years, the total of invisible demands was always pitched higher than India’s ability to meet the total through foreign exchange earnings, no matter how fast the latter might grow, so indebtedness to Britain was enforced. India’s huge external earnings not only magically disappeared into the yawning maw of the Secretary of State’s account in London, but the country was shown to be in perpetual deficit. Had its own gold and foreign exchange earnings from export surplus actually been credited to it, even partially if not wholly, then given the large size of these earnings, India could have imported technology to build up a modern industrial structure much earlier than Japan did after its 1868 Meiji revolution, or exported capital itself and not been obliged to borrow. The Indian railways could have been built several times over from India’s own exceptionally high external earnings during the raw cotton boom of the 1860s and 1870s (see Table 9.1 and Figure 9.1). Between 1860 and 1876, commodity export surplus earnings totaled £135 million, whereas railway and irrigation investment was only £26 million. But since all of India’s gold and forex earnings was appropriated by Britain using the method discussed earlier, borrowing from the London money market was thrust on India for building railways, at an interest rate guaranteed to foreign private lenders by the colonial government, regardless of the actual profitability of the railways.