Economic Ideas of Dadabhai Naoroji
Economic Idea # 1. National Income of India:
Naoroji was not satisfied with the official estimates regarding the national income of India during the
British rule. On the basis of the official data, Naoroji himself calculated the per capita income for the
years 1867-70 at Rs. 20 only. On the other hand, the basic requirements of an ordinary labourer, as
calculated by him was about Rs. 34. He concluded that even for such food and clothing which was
provided to a criminal, a good seasonal production was not enough.
The high and middle classes get a larger share, while the poor masses did not get enough for their
basic necessaries of life. It was in this context of growing disparities of income that Naoroji spoke of
two Indians one the prosperous and the other poor. The prosperous India was the India of the British
and the foreigners, while the poor India was the India of the Indians.
But while calculating the per-capita income, Naoroji had equally apportioned the value of agricultural
produce and manufactures among all the people without taking care of the actual number of persons
employed in agriculture, industries and other professions. Though the method adopted by Naoroji was
criticised by F.C. Danvers, an employee of India office, Dr. V.K.R. V. Rao had supported the method
adopted by Naoroji and paid a great tribute to him as a statistician.
Economic Idea # 2. Taxation, Military Expenditure and Public Department:
A glaring example of exploitation of Indian resources and discrimination of the Indians is the taxation
policy adopted by the British Government. While in England, taxes constituted 8 per cent of the
income, in India it was about 15 per cent. He criticised the then Indian Government for abolishing the
duties on cotton imports from Manchester as it was harmful to the newly established Indian factories.
According to Naoroji, the main cause of India’s poverty was the excessive expenditure on European
services and interest paid on public debts. In 1870 itself Gladstone admitted that India was “too much
burdened.” In 1893 he said that the military expenditure of India was alarming.
So Naoroji suggested that the military expenditure should be limited and England should pay her
share for the maintenance of British army in India and for other military services. In the case of
railways, Naoroji argues that the entire benefit was enjoyed by the Britishers, and the burden of
foreign debts was borne by India.
Economic Idea # 3. Drain Theory:
Naoroji was famous as an economist for his “Drain Theory”. He developed this theory to explain the
conditions of poverty in India. The drain theory emphasized the fact that the management and
institutions of British India were prone to a mechanism of the economic drain.
Naoroji felt that under the British rule, India had the costliest administration in the world. It had a
disastrous effect on the Indian economy. Naoroji estimated that the drain which was to the tune of 3
million pounds in the beginning of the 19th century increased to 30 million pounds at the end of the
last century.
The drain of wealth took place is several ways:
1. Large remittances were made by European officials of their savings in India.
2. Large remittances were made in the form of salaries and pensions.
3. India had to pay for government expenditure in England also.
4. Non-official Europeans made remittances from their business profits in India.
The money which had gone out of India, to England came back as British capital and foreigners had
monopolized trade and industry. It had once again resulted in the drain of wealth. Thus the drain
became continuous and it had affected capital formation in India.
Naoroji collected a lot of statistical data to prove his drain theory. He examined the imports and
exports between 1835 and 1872 and pointed out that the value of exports was greater than that of
imports by 500 million pounds. The drain would have been greater, if interest had been calculated on
the amount. No country could bear such a drain upon its resources without sustaining very serious
injury. Further, when the railways were built in India, Indians had to spend large sums on salaries and
allowances to European staff for all the top posts were manned by the Britishers.
Naoroji felt that the former rulers who plundered India’s wealth by their invasions now and then were
now better than the British rulers. He said, “The former rulers were like butchers hacking here and
there, but the English with their scientific scalpel cut to the very heart….. there is no wound to be
seen, and soon the plaster of the high talk of civilisation, progress and what not covers up the wound.”
Thus according the Naoroji, the economic resources of India were drained in two ways:
(a) Through internal drain, i.e., through the transfer of purchasing power by means of taxation,
interest payments and profits from poor classes/regions to the rich classes/ regions,
(b) Through external drain, i.e., through unrequired exports which produced no equivalent returns in
the form of imports. The dynamics of the process of external drain is functionally related to a net
transfer of funds, with its adverse effects on India’s terms of trade. Thus while internal drain refers to
the exploitation of poor regions or individuals by the rich within a country, external drain implies the
exploitation of a poor country by the rich.
Naoroji suggested the following measures to remove India’s poverty and to reduce the drain:
1. Indians and Englishmen should be paid equal salary for the same type of job. Regarding the
Britishers employed in India and the Indians employed in England, he suggested that a fair and
reasonable apportionment between the two should be made.
2. Britishers were getting high salaries and so they should not be paid any pension.
3. No country could invade India through the sea and so she should not be charged for the
maintenance of the India navy.
4. Indians should be given due representation in the government and foreign capital should come but
not the foreign capitalist who took everything from India.
Economic Idea # 4. Criticism of British Administration:Through the speeches in the House of
Commons, Naoroji severely criticized the British administration in India. The main attack was on the
unjust, destructive and exploitative attitude of the East India Company. It was, on the one hand
destroying the internal trade of the country and on the other hand, employing the imported labour in
administration.
Critical Estimate:Naoroji was the first economic thinker who provided the pattern of economic
thought for modern India. As he emphasized the material concept of wealth and the circulation of
National income, we can say that he had been considerably influenced by the physiocratic school.
He was the first Indian to calculate the per-capita and national income. He believed that the economic
phenomena were linked with the moral, social and political factors. The inductive method
predominated his writings. His main contribution was the Drain theory. He gave a picture of the
Indian economy in a realistic sense.
