The Effects of Colonialism in India on the British Rate of Profit

In our journal Comunismo we have briefly outlined the history of the Indian region up the first half of the nineteenth century. We discussed the most significant moments, particularly during the early colonial period. We referred both to the texts of Marx and Engels, and we supported our work via recent academic studies.

In this report, we aim to explore the impact of colonial rule in India on the British economy.

In fact, trade with colonial India contributed greatly to the Empire’s economy, fostering development of agriculture, mining, manufacturing, and, more generally, all British industry.

Marx and Engels pointed out that Britain’s role as an industrial and commercial power originated with early industrialization and thus with the intensive exploitation of the British proletariat. At the same time, colonial trade also brought considerable benefits to the British bourgeoisie.

Through the appropriation of local wealth, facilitated by both coercion and unequal exchange agreements, the British bourgeoisie consolidated its economic position.

However, it is crucial to remember that the wealth derived from these practices still takes the form of value.

This was surplus value, gained from exploiting the underpaid labor of the subjugated proletarian masses and by forcing the propertied classes in India to enter into unfavorable trade agreements.

The British economy benefited extensively from draining value from the colonies, a process that required less effort than those needed to earn equivalent profits domestically.

This drain of value also helped maintain relative social peace between the English bourgeoisie and proletariat.

In fact, the empire was able to shift the cost of its internal stability onto the colonies, ensuring social peace at home. This allowed the English proletariat—the first to challenge the bourgeoisie with independent class organizations—to enjoy some improvement in their conditions, as well as the growth of the working-class aristocracy and the so-called “middle class.”

Moreover, it should be noted that Britain, which often ran a trade deficit, was able to balance this chronic situation precisely because of the massive drain of value from the Indian subcontinent.

But let us summarize some key points of colonial history, so we can see the turning points more clearly.

The Battle of Plassey in 1757 marked the moment when the British took control of Bengal, wresting it from the French.

The main difference between French and British colonialism was the private character of the East India Company.

While France managed the colonies through the central government and restricted colonial shipping based on national finances, Britain left the East India Company a monopoly on overseas trade.

This system allowed Britain to finance expansion campaigns without drawing on the state coffers;

The Company incurred costs by drawing directly from the resources of local people.

The Company, moreover, so deeply embodied the spirit of privatism that it even granted its employees permission to trade on their own account in overseas regions.

In Comunismo No. 94 we already examined the role of the East India Company, known for “indiscriminate looting” and “extorting money from members of the Mughal ruling class,” actions that symbolize the predatory nature of British colonialism in India.

The East India Company’s voracity reached such levels that the British government had to intervene in order to safeguard its dominance over the region.

In 1793, the Permanent Settlement Act formalized the division of revenue between the Company and landowners (zamindars).

Later, the Charter Act of 1813 attempted to open the market through a licensing system, while the Charter Act of 1833 ended the Company’s monopoly. This marked the beginning of the official colonization of India.

Finally, in 1857, following the violent Sepoy Revolt described in Comunismo 97, the Crown took direct control of the subcontinent in order to protect its strategic interests.

On the end of the Company, it is worth quoting directly from Karl Marx, who wrote an effective epitaph for the East India Company:

“They do not die like heroes, it must be confessed; but they have bartered away their power, as they crept into it, bit by bit, in a business-like way. In fact, their whole history is one of buying and selling. They commenced by buying sovereignty, and they have ended by selling it. They have fallen, not in a pitched battle, but under the hammer of the auctioneer, into the hands of the highest bidder. […]

In 1858, after having solemnly pledged themselves to the Court of Proprietors to resist by all constitutional “means” the transfer to the Crown of the governing powers of the a East India Company, they have accepted that principle, and agreed to a bill penal as regards the Company, but securing emolument and place to its principal Directors. If the death of a hero, as Schiller says, resembles the setting of the sun, the exit of the East India Company bears more likeness to the compromise effected by a bankrupt with his creditors.” _{(New York Daily Tribune, July 24, 1858)}

Beyond the East India Company, it is necessary to analyze the process of transformation of the Indian market that began with the Charter Act of 1813.

This reform marked a real transformation for India.

In fact, starting in 1813 the destruction of the local manufacturing system took place.

After all, “[h]owever changing the political aspect of India’s past must appear, its social condition has remained unaltered since its remotest antiquity, until the first decennium of the 19th century. The hand-loom and the spinning-wheel, producing their regular myriads of spinners and weavers, were the pivots of the structure of that society. From immemorial times, Europe received the admirable textures of Indian labor, sending in return for them her precious metals, and furnishing thereby his material to the goldsmith, that indispensable member of Indian society, whose love of finery is so great that even the lowest class, those who go about nearly naked, have commonly a pair of golden ear-rings and a gold ornament of some kind hung round their necks. Rings on the fingers and toes have also been common. Women as well as children frequently wore massive bracelets and anklets of gold or silver, and statuettes of divinities in gold and silver were met with in the households. It was the British intruder who broke up the Indian hand-loom and destroyed the spinning-wheel. England began with driving the Indian cottons from the European market; it then introduced twist into Hindostan, and in the end inundated the very mother country of cotton with cottons. From 1818 to 1836 the export of twist from Great Britain to India rose in the proportion of 1 to 5,200. In 1824 the export of British muslins to India hardly amounted to 1,000,000 yards, while in 1837 it surpassed 64,000,000 of yards. But at the same time the population of Dacca decreased from 150,000 inhabitants to 20,000. This decline of Indian towns celebrated for their fabrics was by no means the worst consequence. British steam and science uprooted, over the whole surface of Hindostan, the union between agriculture and manufacturing industry.” _{(Karl Marx, New York Daily Tribune, June 25 1853)}

The liberalization of the Indian market reduced the power of the East India Company. In addition, liberalization also accelerated the process by which India was transformed from a historically manufactures-exporting region to a manufactures-importing and commodities-exporting region.

We find this trend well summarized in the following table.

Export shares of the global manufacturing sector (Bora, Kabeer).

We need to better define how the system of value drainage from India worked and how it evolved from the period of the India Company to the properly colonial period.

Beginning with the Charter Act of 1833, as the East India Company’s stranglehold on the region loosened, Indian exports to Britain declined dramatically while imports grew significantly.

From 1857, with the complete liberalization of trade in India, without passing through British ports, exports departed directly from India to countries with which the British Empire maintained a trade deficit.

The British government required foreign importers of Indian commodities to make transactions only after converting foreign currencies—in gold or silver—into special bills called special Council bills issued in London.

This system ensured there were sufficient gold deposits to cover the issuance of this paper money.

So Indian commodity producers were paid with these special bills by going to a colonial office in charge in the various locations in India, which converted these bills into rupees.

The conversion was not for the amount of the value of one’s own goods, but for a value corresponding to about one-third of the taxes collected in the region. In fact the conversion of Council bills into rupees depended on the colonial budget.

In other words, instead of paying for Indian goods out of their own pockets, British traders “bought” them from farmers and weavers with money taken from them through the taxation system.

Gold, in the form of foreign currencies, was exchanged for Council bills and remained in England.

It is estimated that the drain of value obtained through this system from 1765 to 1938 amounted to about $44.6 trillion.

This is how unequal exchange technically worked in India.

Furthermore, precisely because of value drainage, Indian producers found themselves increasingly in debt. Thus, another major source of wealth was from interest on loans, which to varying degrees was levied on a largely indebted population.

To this value-draining system, one must add the simple superprofit obtained because “the rate of profit is higher there due to backward development, and likewise the exploitation of labour, because of the use of slaves, coolies, etc.” ^{(Capital, Vol. III, Chapter 14, Part V)}

In the second half of the 19th century, India finally transformed from an exporter to an importer of manufactured goods. Thus, it became an exporter of cheap raw materials and an absorber of British exports.

By 1870 an estimated one-fifth of Britain’s exports were going to India, which made it the leading importer of British goods.

From a Marxist point of view, it would be insignificant to try to trace the origin of every single penny obtained through colonial trade in India to understand how the British bourgeoisie benefited.

Such a study would not only be difficult to implement but would also prove to be of little use.

Indeed, it would not allow us to understand its reality through the lens of class struggle.

Instead, the Marxist approach ignores individual details and focuses instead on collective dynamics. This is somewhat similar to how Gibbs approached statistical thermodynamics, which demonstrated the futility of studying the behavior of each individual particle in order to understand the general laws of matter.

Of considerable interest, is the very recent study by academic Kabeer Bora _{(The Drain Gain)}:

An investigation into how colonial drain helped keep British economy buoyant) which analyzes the role of British domination of India as a counter-trend to the fall of the British rate of profit.

Before going into the merits of what this study finds, we find it necessary to reiterate in the most general terms the counteracting effects to the fall in the rate of profit given by British colonialism.

The more extensive and populated the economic domain, the greater the unit of operation and proportionately lower the costs of production. The greater the degree of specialization and division of labor may be, the greater the relocation of industries to places where natural conditions are more favorable, and the greater the productivity of labor.

“Due to mass production British industry, which was the workshop of the world down to the 1870s, could carry through a division of labour, increases in productivity and cost savings to a level that was unattainable elsewhere.” _{(Henryk Grossman, Law of the Accumulation and Breakdown)}

We know that the rate of profit is an inverse function of the price of raw material, and we have seen how the British colonial system systematically underpaid for goods imported from India under the value drain system as India became a commodity exporting country.

A classic thesis of our school to assert that world trade affects the rate of profit. In Chapter 4 of Capital Vol III, Marx reproaches Ricardo for misjudging this influence.

Elsewhere Marx says that Ricardo “does not see how enormously important it is for England, for example, to secure cheaper raw materials for industry, and that in this case, as I have shown previously, the rate of profit rises although prices fall, whereas in the reverse case, with rising prices, the rate of profit can fall, even if wages remain the same in both cases.” _{(Theories of Surplus Value, Chapter 16, Section II, Part b)}

Just as within capitalism in general, entrepreneurs with an advanced technique above the social average who sell their goods at average social prices will achieve superprofits, at the expense of those entrepreneurs whose technique remains below the social average. In the same way, countries with high technological development will achieve superprofits at the expense of those countries whose technical and economic development is backward.

However, this should not lead one to believe—as Rosa Luxemburg did—that the industrialization of the primary sector in the colonies constitutes “the beginning of the end” of the capitalist mode of production.

Of course, such a claim has now been refuted by history.

However, in order to anticipate some useful arguments for understanding the post-colonial phase, it seems useful to us to quote Grossmann again “if an agricultural country switches to the production of textile fabrics that it had hitherto imported from Europe, then European export of this article will decrease. However, the export of cotton thread, machine tools, dyes will also grow. Alongside these the export of numerous other articles, for which there was no need before and which develop as the purchasing power of the new countries increases:

all complex machines, pulp machine production, printing machines, …”

Now that we’ve established the general terms of this issue, we can analyze Kabeer Bora’s results.

For obvious reasons, we cannot go into detail about the methodology he used to analyze the rate of profit and value drain from India to Britain. We will not be going into how this was calculated or statistically validated. Instead, we are interested in grasping the meaning of this analysis.

In the figure below we can visualize the trend of the British rate of profit and value drain.

Using the statistical tool of regression analysis, Kabeer Bora reveals that by increasing the rate of profit extracted from India by 1% would allow a 9% increase in the British rate of profit.

The leverage colonialism allowed could not have been better explicated.