The Drain of Wealth Theory, proposed by Dadabhai Naoroji, explains how British colonial rule systematically transferred India’s wealth to Britain, causing poverty and economic stagnation.

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• The theory was introduced in 1867, highlighting how British policies led to continuous economic exploitation by transferring India’s resources, revenue, and profits to Britain without adequate returns.
• It argued that India exported raw materials cheaply while importing expensive finished goods, creating an unequal trade system that benefited Britain and weakened India’s economy.
• Large sums of money were sent to Britain through salaries, pensions, and profits of British officials, reducing capital availability for India’s development and growth.
• “Home charges” such as administrative expenses, debt payments, and costs of British governance were paid using Indian revenues, further intensifying the economic drain.
• High taxation policies imposed on Indian farmers and landowners extracted wealth from the population, much of which was transferred to Britain instead of being reinvested locally.
• Profits from British investments in railways, plantations, and industries in India were repatriated to Britain, limiting domestic capital formation and industrial growth.
• The continuous outflow of wealth led to widespread poverty, famines, and decline of traditional industries, especially textiles, causing unemployment and economic backwardness.
• The theory played a key role in shaping Indian nationalism by providing an economic critique of colonial rule and strengthening demands for self-governance and independence.