The following points highlight the top four economic ideas of Dadabhai Naoroji. The economic ideas are: 1. National Income of India 2. Taxation, Military Expenditure and Public Department 3. Drain Theory 4. Criticism of British Administration.

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. “The Indian Economist” was the only journal which gave such knowledge in those days. Naoroji regarded this information regarding the country’s prosperity as insufficient and misleading.

He pointed out that unless complete information about:

(a) The average annual income per head and


(b) “The requirements of labourer to live in working health and not as a starved beast of burden” was supplied every year, it was useless to make unsounded statement that India was progressing.

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.


While replying Danver’s criticism as to how people were able to live with Rs. 20 per annum when their actual expenditure was Rs. 34, Naoroji said, “As the balance of income every year available for the use of people of India did not suffice for the works of the year, the capital  wealth of country is drawn upon, and the country goes on becoming poorer and poorer and more and more weakened in its capacity of production.”

Another criticism was that Naoroji did not include in the calculation of total income of the country, items like railway wealth, government stock, house property, trade profit, salaries, non- agricultural income etc. Replying to this criticism, Naoroji maintained that mere movement of goods by the railways did not add to the existing wealth of the country.

The railways in no way increased the material wealth of the country. Regarding the Government stock, he believes that it did not increase the material wealth of the country. For example, the interest paid on a government bond was made from the revenue of the country.

In the same way house property and internal trade did not create material production. He also said that profits of India’s foreign trade were enjoyed by England. Regarding the payment of salaries and pensions, Naoroji argued that these were paid out of the revenue of the country.

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.

The effects of external drain on the Indian economy can be explained with the following model:


P > Y …(1)

Y-T – E-(X-M) – (C+ 1d)-(X-M) …(2)

As a result of economic drain or unilateral transfer (T), national income (Y) remains below its total production (P). T is a leakage from Y. On the expenditure side, the corresponding leakage is export surplus (X-M), where X stands for the value of exports and M for the value of imports. Export surplus is to be deducted from total expenditure E; C and Id, i.e., consumption and domestic investment, being the constituents of E.

In this model, T has to be interpreted as net transfer because in actual practice its size depended upon the reverse flow of sterling loans as a balancing factor. If X-M is insufficient to be equal to T, or if there is an exceptional rise in T, the gap had to be filled by sterling loans. This inflow of capital in the form of loans produces adverse balance of trade in the borrowing country. As Haberler remarked, “A country making large unilateral payments will tend to import capital in one way or another. In this way, the direct effect of these payments on the balance of trade and services will be suspended or weakened”. Haberler’s conclusion is fully applicable to India.

J.S.Mill opined that, “it was an extraction of the life-blood from the veins of national industry which no subsequent introduction of nourishment is furnished to rescue.” Naoroji quoted F.J.Shore, J.B.Norton, Robert Knought, Sir George Campbell, Colonel Band Smith and many others who had written to the Government that India was getting from bad to worse; and the poverty of the country and its people had gone up to “an extent almost unparalleled”.

Naoroji himself wrote – “Even an ocean if it lost some water every-day which never returned to it, would be dried up in time, under similar conditions, wealthy England even would be soon reduced to poverty.”


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.


Thus Indians were denied their due share in the administration of the country. He felt that it was wrong to consider India as Nature’s tragedy and the Indian agriculture, a gamble in the hands of the monsoon. He said that, “If India did not progress under the Englishmen there was no justification for their existence here”.

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.