Under the British, the condition of the Indian peasants deteriorated steadily.

After obtaining the

diwani of Bihar, Bengal and Orissa the Englishmen introduced different land revenue policies.

Their ultimate aim was the appropriation of maximum revenue from the Indian Zamindars and
peasants. The exaction of exorbitant rents by the government oppressed the peasants heavily. In
order to meet the high demand of revenue, the peasants perpetually remained indebted to the
local money-lenders. Many of them lost their lands to these greedy moneylenders for the
inability to pay back the borrowed amount.

The policy of commercialization of agriculture by the British encouraged market oriented

production of cash crops such as opium, tea, coffee, sugar, jute and indigo. Indian peasants were
forced to grow these cash crops that spoiled the fertility of the land and no other crop could be
grown on it.

The growth of minimum of subsistence crops led to the deterioration and impoverishment of the
Indian agriculture and the cultivators. The peasant was suppressed under triple burden of the
government, landlord and the moneylender. His subsistence base was completely ruined by the
agrarian policies of the British government. The lack of attention in the development of
agriculture and in use of new equipments and methods on the part of the British government also
ruined Indian agriculture.

Land Rights and Land Settlements:

Broadly speaking, the English adopted three types of land tenures in India viz., the Zamindari
tenure, the Mahalwari tenure and the Ryotwari tenure.

The Permanent Zamindari Settlements:

The Zamindari system was a creation of the British rule and many non-economic considerations
entered into its acceptance. The system was known by different names like Jagirdari, Malguzari,
Biswedari, etc. Under the Permanent Settlement system the state’s land revenue demand was
settled once for, all while in other Zamindari tracts the land revenue was revised after a fixed
number of years ranging from 10 to 40 years. This was introduced by Lord Cornwallis in 1793
on the recommendation of Sir John Shore, the President of the Board of Revenue.
Under the Zamindari system, the Zamindar was recognised as the owner who could mortgage,
bequeath and sell the land. The state held the Zamindar responsible for the payment of land
revenue and in default thereof the land could be confiscated and sold out.

A snag in the Permanent Settlement of Bengal was that while the state’s land revenue demand
was fixed (the stat demand was fixed at 89% of the rental, leaving only 11 % with the
Zamindari), the rent to be realised by the landlord from the cultivator was left unsettled and
unspecified.

This resulted in rack-renting and frequent ejections of tenants from their traditional holdings. The
Bengal Rent Acts of 1859 and 1885 provided some relief to cultivators. Permanent Zamindari
settlements were made in Bengal, Bihar, Orissa, Benaras Division of the U.P, Northern Carnatic
and roughly covered 19% of the total area of British India.

The Ryotwari System:

Under this system every ‘registered’ holder of land was recognised as the proprietor of land and
was held responsible for direct payment of land revenue to the state. He had the right to sub-let
his land holdings, to transfer, mortgage or sell it. He was not evicted from his holdings by the
Government so long as he paid the state demand of land revenue.

In Madras Presidency, the first land revenue settlements were made in the Baramahal district
after its acquisition by the Company in 1792. Captain Read assisted by Thomas Munro fixed the
state demand on the basis of 50% of the estimated produce of the fields, which worked out to be
more than the whole economic rent.

Thomas Munro (Governor 1820-27) extended the Ryotwari systems to all parts of the province
(except the permanently settled areas) on the basis of 1/3rd of the gross produce of the holdings
which too absorbed nearly the whole of the economic rental.

The state demand was fixed in money and had no connection with the actual yield of the holding
or the prevailing prices in the market. In 1855 an extensive survey and settlement plan was
decided on the basis of 30% of the gross produce. Actual work began in 1861. In Bombay
Presidency too the Company decided in favour of the Ryotwari system with a view to the
elimination of landlords or village communities which could intercept their profits.

Thus the Ryotwari settlements were made in major portions of Bombay and Madras
Presidencies, in Assam and some other parts of British India covering roughly 51% of the area.

The Mahalwari System:

Under this system, the unit for revenue settlement was the village or the Mahal (i.e., the estate).
The village land belonged jointly to the village community technically the body of ‘co-sharers’
who were jointly responsible for payment of land revenue, though individual responsibility was
also there.

The Mahalwari tenure was introduced in major portions of the UP, the Central Provinces the
Punjab (with variations) and covered nearly 30% of the area. Regulation VII of 1822 gave legal
sanction to the recommendation of Holt Mackenzie, who recorded his Minute in 1819
emphasizing the existence of village communities in North India. He recommended a survey of
land, preparation of record of rights in land, settlement of land revenue demand village by village
or mahal by mahal and collection of land revenue through the village headman or Lambardar.

Thus the land revenue settlements were made on the basis of 80% of the rental value, payable by
the Zamindars. In cases where estates were held by cultivators in common tenancy, the state
demand was allowed to be fixed at 95% of the rental. The system broke down because of the
excessive state demand and harshness in its working and collection of land revenue.

Regulation IX of 1833 provided for simplification of the procedure for preparing estimates of
produce and of rents and introduction of the system of fixing average rents for different classes
of soil. The new scheme worked under the supervision of Mertins Bird remembered as the Father
of Land Settlements in Northern India.

The state demand was fixed at 66% of the rental value and the settlement was made for 30 years.
The settlement work under the scheme began in 1833 and was completed under the
administration of James Thomason. Under the revised Saharanpur Rules of 1855, the state
demand was limited to 50% of the rental value.
Rural Indebtedness:
High revenue demands led to devastation, as it led to poverty and the deterioration of agriculture
in the 19th century. It forced the peasant to fall into the clutches of the money-lender. If the
peasant could not pay the money, his land was sold-off. Gradually more land passed into the
hands of moneylenders, merchants, rich peasants and other moneyed classes.

The growing commercialization also helped the money-lender cum merchant to exploit the
cultivator. The peasant was forced to sell his produce just after the harvest and at whatever price
he could get as he had to meet in time the demands of the government, the landlord and the
money-lender. Added to the above factors, was the increase of population pressure on agriculture
weighted on the peasants heavily.

Commercialization of crops

What Is Drain of Wealth Theory?

It refers to the economic critique of colonial rule in India that was advocated by the early
nationalists. They described the constant one way flow of wealth from India to England for
which India received no returns as 'Drain of Wealth'. This occurs when gold and silver flow
out of a country as a result of an adverse trade balance

Origins of Drain of Wealth

In the 17th and early 18th centuries, the English East India Company used to import bullion -
gold and silver to the tune of 20 million, and funds from England for purchasing goods in India.
These goods were then exported to Europe for sale. After the Battles of Plassey (1757) and
Buxar (1764), the Treaty of Allahabad (1765) was signed, which entitled the Company to collect
land revenue from the province of Bengal, the Company began generating surplus
revenues (after paying the duties and tribute to the Nawab of Bengal).The Company used these
revenues to purchase goods in India which were then exported for sale in Europe and
elsewhere. It eventually eliminated the need for the Company to import bullion and funds from
England to finance its operations in India. It resulted in a situation where Indian revenues were
used to purchase Indian goods which were then exported out of India, without India getting
anything in return. This was the beginning of drain of India's wealth.
Drain of Wealth was Facilitated by the Position Enjoyed by East India Company

The Company initially had a dual role. On one hand, it functioned as a government entity which
had the power to levy and collect taxes such as land revenue.On the other hand, it also
functioned as a commercial entity and invested the revenues collected in India to expand its
business. The revenues going to the Company had been termed by historians as a political
tribute. This was because the political power enjoyed by the Company was the reason for its
ability to generate revenues out of Indian territories and it was a tribute in the sense that India did
not get anything in return for paying such revenues. It was essentially a political trade and thus
not a normal trade. It generated a revenue surplus through -

a. Oppressive land revenue policies

b. Monopolistic control over Indian markets

c. Exactions made by company officials

The company used this revenue surplus as investment and made purchases with it. This system,
however was brought to an end by the Charter Act of 1813.

Constituents of Drain of Wealth

Territorial Expansion

The Company used the revenues for extending its territories in India i.e., they were used to
finance the Company's military campaigns against native rulers. Territorial expansion enabled
the Company to in turn generate greater commercial revenues in the form access to Indian goods
for exports. Thus, under the Company's rule, India was caught in a never-ending, self-contained
system of drain of wealth.

Movement of Private Wealth

Apart from the Company's revenues, the drain also included the movement of private funds to
England. This had happened primarily by the means of bills of exchange. Under this facility,
bills of exchange can be purchased in India using money raised in India. These bills can be
exchanged in England for local currency. Some of the private funds that were accumulated also
included the earnings of Englishmen from plunders during wars, bribes obtained from the native
states, and the wealth accumulated from fraudulent business deals with Indian merchants.
According to an estimate by G.A. Princep, a reputed English businessman, over Rs. 1 crore was
sent away from India every year between 1813 and 1820 as private wealth.

Payments to Foreign Banking and Insurance Companies

Another form of movement of wealth away from India was the financial capital. It included the
monies paid to banks, insurance companies, shipping companies etc., in England for the services
they render in India. One estimate puts this amount at Rs. 57 lakh per annum between 1813 and
1820.

Remittances by the Company - Home Charges

The Company's remittances to England also formed a major part of the drain. This included,

 Salaries and pensions paid to the Company's employees in England.

 Interest amount on loans raised by the Company in England.

 Dividends paid to the Company's stockholders.

Such remittances by the Company later came to be known as the 'Home Charges' when the
British Parliament took over administrative control of India. Home charges also included,

 Salaries and pensions paid to the British civilian and military personnel posted in
India which were remitted by them to England.

 Store purchases made in England by the Secretary of State on behalf of

Government of India for the civilian and military departmental needs.
Though the amount remitted varied every year, it was estimated to be in the range of one to three
crore rupees per annum.

Reasons for the Drain of Wealth

One of the earliest propagators of the drain of wealth theory was Dadabhai Naoroji. In 1867, he
put forward the idea that the colonial rule was draining and bleeding India of its wealth. He
wrote (in his work "Poverty and Un-British Rule in India", 1901) that it was the pitiless action of
British policy which was eating India off its substance. He lamented that the perversion of
economic laws in India by the British rule is draining India of its prosperity and is destroying the
nation. He identified the following reasons for this drain:

 All the civilian and military expenses of Britain were paid by India.

 Indian revenues paid for the territorial expansion of the British Empire, within and
outside India.

 Annuities that were paid on railway and irrigation works in India which were financed by
costly British capital.

 The skewed nature of free trade imposed on India - with restricted exports and free
imports.

Another well-known argument supporting the drain of wealth was given by R.C. Dutt. In his
work, "Economic History of India", Dutt had equated the drain of wealth to moisture being
sucked out of Indian soil to fertilize the lands in England. He commented that the economic drain
out of India was so severe that it had impoverished one of the most prosperous countries on
earth. He lamented that India was reduced to a land of famines which were frequent, widespread
and fatal as a result of this drain.

Impact of Drain of Wealth on Indian Economy

 It had impoverished all the section of Indian society with peasants being the worst
victims. They bore the brunt of the taxes raised by the Company and later by the
Government of India in the form of land revenue.
  It drained India of its precious capital which could have otherwise been invested in
industrialization and modernization of agriculture in India. The drain of Indian wealth
became a major source of financing the Industrial Revolution in England and is also the
reason why such revolution did not take place in India.

 Dadabhai Naoroji had estimated that every year, anywhere between 30 million to 40
million pound sterlings were flowing out of India. He described it as the main cause of
India's poverty.

 It also resulted in a 'moral drain' which consisted in exclusion of Indians from position of
trust and responsibility in their own land.

Impact of Drain of Wealth Theory on Indian Nationalism

 The drain theory was instrumental in countering the reason given by the British for the
colonial rule which was India being the "White Man's Burden". It became evident that the
colonial rule in India was exploitative.

 The economic criticism of British rule had helped in shattering the myth of benevolence
of British administration in India. While the colonial rulers had justified their control over
India as means for India's economic development, Indian nationalists were able to
counter this by asserting that India was economically backward precisely because of the
British rule, the British free trade, industry and capital.

 It was instrumental in laying the foundations for the demand for Swaraj which was raised
by the Extremist leaders such as B.G.Tilak. The demand for Swaraj, mentioned in the
1906 session of the Congress at Benaras, can be seen as a direct outcome of the drain
theory.

 It was successful in capturing the imagination of peasants for whom the drain was an
easy concept to comprehend. It was thus helpful in expanding the mass base of the
freedom struggle.

Drain of wealth theory highlights the mercantile character of British rule in India that was
inherently exploitative. It shook the myth of Britain's benevolence and laid strong foundations
for ensuing freedom struggle.