A Tale of Two Economies: How Richer or Poorer would the UK Economy be without British Colonialism?

Utsa Patnaik, an economic historian, made waves in the academic world with her 2018 paper that claimed Britain had taken a staggering $45 trillion from India during colonization. Her findings were met with mixed reactions, with some praising them as a stark reminder of Britain's injustice, while others dismissed them as outrageous. In an interview, Patnaik highlighted how the complexities of the market had masked the true impact, hidden behind a facade of apparently positive economic indicators.
Patnaik's work, though groundbreaking in putting an exact figure on the damage to India's economy, is not the first of its kind. Dadabhai Naoroji, a prominent British Indian MP and a founding member of the Indian National Congress had long been associated with the theory of drainage, decrying how the wealth taken away by the Englishmen caused misery and deprivation in India. Other scholars like Bhaskar Pandurang Tarkhadkar, Govind Vitthal Kunte, and Ramkrishna Vishwanath had also written extensively on Britain's drain of wealth from India as far back as the 1840s.
Despite the theory's introduction almost 200 years ago, Patnaik's paper and the staggering $45 trillion figure continue to resonate and fuel heated debates among academics and historians. However, there is still no consensus on the true extent of the damage caused by Britain's exploitation of India's resources.

The idea that colonialism was a force for good, helping to modernize the colonies and set them on a path to progress, has been thoroughly discredited. However, the idea that colonialism did not play a major role in the modernization of European, American, and Japanese colonizers persists among many scholars and has not been adequately examined. Even among those who consider themselves radical or Marxist, there is a tendency to downplay the significance of "colonial plunder" in the primitive accumulation that led to the emergence of capitalism in Europe.

This article delves into how Britain's imperial rule over India has fundamentally shaped the UK's economic landscape, and why it still matters today.

First Phase: Merchant Capital Stage

In the 18th century, Britain's trading relationship with India began to flourish, leading to the eventual colonization of the country. The victory in the Battle of Plassey in 1757 marked a turning point, as Britain began seizing and rapidly expanding its control over Indian territories. What followed was a bizarre form of international trade, whereby India was made to pay for its own exports, using revenues raised by taxing its own people.

For nearly two centuries, India was forced to maintain a continuous flow of unrequited exports to Britain, with no positive impact on its balance of payments as it was siphoned off as a “tribute”. This drain or tribute represented a significant portion of Britain's capital formation and was critical to the country's process of capital accumulation. The transfers from India and other colonies were also instrumental in sustaining the development of capitalism in Britain and maintaining the standard of living of its people.

The early stages of industrialization in capitalism were harsh and required substantial initial investment, often at the expense of the working class or peasantry. However, Britain and other metropolitan powers were able to avoid this burden to some extent by extracting surplus from their colonies. This had a profound impact, allowing the metropolitan society as a whole to benefit from colonialism at the expense of the colonized people

Overall, India's net inflows to Britain from 1765-1812 were not only substantial but, as in the words of Javier Cuenca-Esteban, "arguably the least dispensable" in terms of bolstering the British balance of payments during a period of significant financial strain. These inflows played a crucial role in maintaining the economic stability of Britain, illustrating the central role that India played in financing the development of British capitalism.

Second Phase: Industrial Capital Stage

As Britain embarked on its journey towards capitalist development, its methods of direct seizure shifted to match its evolving economic interests. With the dawn of the 18th century, Britain's attention turned towards industrialization and the expansion of its own textile industry. Consequently, Indian exports of textiles were abruptly halted, creating a need for an alternative commodity to fulfill the growing tribute owed by India to Britain.

The solution was found in opium in the early 19th century to fill the void left by Indian textiles. A triangular trade route was established, with British ships loaded with textiles bound for India, and departing India with opium in tow. This opium served as both the tribute owed by India to Britain and as payment for the textiles exported to India. Upon arrival in China, the opium was traded for tea and silk, which were then transported back to Western markets.

By utilizing this method, Britain not only realized the tribute owed by India via China but also avoided the need to pay China with bullion for its tea and silk. The tax appropriated from the Indian people was thus converted to opium, and then to tea and silk, ultimately realized as the global market value of these commodities. In a mere 14 years, exports of opium from India had shot up sixfold, and by 1855, Indian exports of opium to China alone were valued at a staggering £6.23 million - paying for most of the tea and silk, worth approximately £8.5 million, that Britain had acquired from China.

In essence, this exchange represented the very essence of colonialism - with Britain benefiting from the entire colonial population, rather than solely the metropolitan bourgeoisie.

As the world rapidly industrialized in the late 19th century, the demand for food and raw materials grew exponentially, aided by advancements in transportation like the development of railways and the opening of the Suez Canal. During this time, India began to realize its economic potential through a multilateral trading pattern that generated an export surplus with countries such as the US, Japan, and various European nations by exporting raw materials like cotton, indigo, and pig iron.

Meanwhile, Britain enjoyed a massive export surplus with India, exporting textiles and other manufactured goods, including railway stock. However, due to the massive investments it was making globally, Britain was facing a massive balance of payment deficit with the rest of the world, exacerbated by a decline in British exports to newly industrializing countries.

To address this deficit, Britain used its export surplus with India and India’s tribute to adjust its balance of payment deficit with other nations. By appropriating India's export surplus with various countries to the extent of the tribute claims, Britain was able to realize its claims on India.

During this period, India's tribute alone was estimated to have financed over 40% of Britain's balance of payment deficit. This was not surprising considering the size of the tribute from India during this period, which was massive. Between 1871 and 1916, the surpluses transferred from India after applying a compound rate of interest of 4% amounted to a conservative estimate of around £3.2 billion. This figure is comparable to the estimate of around £4 billion for total British foreign investments abroad in 1913, highlighting India's crucial role in the British capital transfers abroad and making it the economic hub of the world between 1870 and 1913.

As Britain embraced industrialization, it faced a crucial challenge: finding markets for its manufactured goods. India had long been the dominant exporter of textiles globally, but as Britain's political control over India strengthened, it began to manipulate state policies to displace Indian production from both global and domestic markets. British cotton manufacturers rapidly replaced Indian production, resulting in India's share of world manufacturing output plummeting from 19.7% in 1800 to a mere 1.4% in 1913.

This devastating blow to Indian industry was exacerbated by the British imposition of a "free-trade" policy that denied modern Indian industry any protection in the domestic market. As a result, India, the largest grower of raw cotton and the largest producer and exporter of cotton textiles until the end of the 18th century, saw its position rapidly diminish. British exports of cotton goods to India, on the other hand, increased dramatically, capturing over 66% of the Indian domestic market by 1887.

It's important to note that British industrialization depended on the colonial, non-industrialized part of the world, which became increasingly critical as the modern industry developed in Europe, the US, and other countries. While Europe and the US had taken a majority of British cotton goods in 1820, this market virtually disappeared as these regions industrialized. By 1900, more than 86% of British textiles were being absorbed by the underdeveloped world, with Asia, primarily India, becoming the chief market in the second half of the 19th century.

India's importance as a market for British goods and a supplier of capital through tribute made it a critical component of sustaining the process of British industrialization. As the British viceroy, Curzon, declared at the turn of the 19th century, India was the "pivot" of the British empire, and losing it would result in the empire's collapse. Thus, India's deindustrialization played a significant role in sustaining British industrialization, and it came at a great cost to the millions who depended on the textile industry for their livelihoods.

Third Phase: Financial Capital Stage

The British economy was in turmoil during the 20th century, struggling to maintain its industrial supremacy as other nations began to surpass it. With its colonial markets providing a lifeline for its industries, Britain's dependency on these markets became critical. However, the first world war brought about a significant shift, causing Britain to lose its status as the world's creditor nation and fall into heavy debt to the United States.

This economic crisis was compounded by the Great Depression and the second world war, which left Britain in desperate need of foreign funds to prop up its financial system and maintain the value of the pound sterling. In this dire situation, Britain turned once again to its colonies, with India bearing the brunt of the financial demands.

India's contribution to the British war effort increased manifold, with defence expenditure skyrocketing, accounting for a staggering 75% of the Indian central government's total expenditure by the war's end.

Thus, retaining India became even more critical for Britain's survival. With London's huge investments abroad making it the "economic hub of the world," the empire's fate was tied to the success of its colonial holdings. In this tumultuous period, India's role as a financial lifeline for Britain became all the more pronounced.

Conclusion

The relationship between Britain and India spanning almost two centuries was undeniably crucial for the former. Initially, India contributed significantly to Britain's industrialization, paving the way for its emergence as a hegemonic power in the world. Later, as Britain faced a relative decline in the global competition in the industrial sphere, India's colonial markets sustained its economy. Even after losing its financial supremacy following World War I, Britain relied on India to see it through the crisis years of the 20th century, up until World War II. This of course meant India being bled of anything between 5 to 10% of her GPD annually for close to two centuries! While the living conditions of the British people were catapulted to new and unprecedented levels that of the Indian people reached an intolerable nadir. Add to this centuries of subjugation done to the colonised people socially, culturally, morally and psychologically. Despite the gains made by the British, the consequences of this unequal relationship continue to cast a long shadow over the present.

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