Dadabhai Naoroji propounded the 'drain theory', explaining how large amount of resources drained from India found their way to England. This was in the form of salaries and pensions of civil and military officials of the colonial state, interest on the loans taken by the Indian government, and huge profits of the British capital employed in India. The latter meant 5% guaranteed profit on investment in railways, and the cost of administration in England.

This drain not only deprived India of her present resources but also of the surplus for future investment. To the contention that the railways signified the commencement of the industrial revolution in India. Naoroji responded that the railways merely enabled the colonial rule to penetrate the Indian interior for getting cheap raw material for British industries and for bringing back the finished goods of the British industry. Thus, it helped the industrial revolution in Britain by providing all benefits to the British manufacture. This diagnosis was propagated through public debate, "publications, etc., and helped shatter the myth of British benevolence. Naoroji and others advocated modernisation of India in real terms, and industrialisation with the help of Indian capital.