Foreign Trade of India: Before Independence

11th February 2020 0 By indiafreenotes

Even being a typical poor underdeveloped country, India’s foreign trade was in a prosperous state during the period under review. In terms of volume of trade and the range of commodities entering into trading list, India was better placed compared to other contemporary underdeveloped countries. But that must not be viewed as an indicator of prosperity. Above all, her pattern of trade was definitely different from those of other underdeveloped countries.

India’s composition of trade (i.e., pattern of imports and exports) before 1813 included manufactured goods as well as primary articles in export list and metals and luxury products in the import list. But such pattern of trade was supplanted by the import of manufactured goods and exports of agricultural raw materials and food grains during much of the nineteenth and twentieth century. This must not be the sign of prosperity or cause for jubilation.

Rather, this situation generated much heat and controversy because, instead of being an engine of growth, foreign trade, as engineered by the British Government, exacerbated economic exploita­tion. It hampered the process of industrialization. It brought untold misery to the masses. Most importantly, of course partly the backwardness of Indian industry and agriculture is ‘the effect of its external trade which moulded into shape the productive mechanism of the country.’

To understand the nature of the controversy it will be fruitful to tell something about the history of India’s foreign trade during 1757 and 1947. The growth of foreign trade during the two centuries can be divided into following unequal periods: 1757 to 1813, 1814 to 1857, 1858 to 1914, and from 1915 to 1947.

The first period—the early years of the British East India Company (EIC)—is known as the ‘age of mercantilism’. During the period under consideration trade statistics is not available. However, some sort of institutional changes in trade took place during this period.

In the mid-18th century, Indian foreign trade was mainly conducted by the English, Dutch, French, and Portuguese traders and merchants. But the revolution of 1757 strengthened the supremacy of the British EIC. In the process, the EIC monopolized trade and ousted the other merchants and traders.

During this period, the composition of trade was based on an exchange of calico, spices and foodstuff and other raw materials for precious bullion (i.e., gold and silver) imported from Europe. The second period dating from 1814 to 1857 saw some fundamental structural changes in the composition of trade when India was reduced to a mere supplier of agricultural products in exchange for imports of finished manufactured articles.

The third period covering roughly 50 years from 1858 to the outbreak of the World War I displayed more or less the same structural features relating to the pattern of trade. This period saw the emergence of multilateral trade. During the inter-war period, India’s foreign trade was of a rollercoaster variety— characterised by boom and slump and revival.

Volume of Foreign Trade Since 1814

It has often been stated that though no industrial revolution during the British rule visited this country, she did go undergo a revolution in commerce as is evident from the volume of trade expansion. Between 1869-70 and 1929-30, the value of foreign trade saw a seven-fold increase.

We ignore trade developments for the period 1757 to 1813 mainly because of the absence of a continuous series of trade statistics before 1800. Above all, trade during this period retained pre-modern character. It has been estimated that the value of trade between India and England for the period 1793-1813 stood at the average annual figure of 2 million pounds. Or India’s foreign trade got the tinge of modern character after 1813. Virtually, throughout the 19th century, there had been a spectacular expansion in trade.

Expansion of trade along with the expansion of railway bore the stamp of growing prosperity of India as was told by the alien ruler. In fact, they prided themselves on this phenomenon. But nationalists dwelt on the ‘negative fairness’. They argued that the real progress of the nation did not lay on the volume and the value of trade. The pattern of trade that the Britishers instituted in this country was really the cause of utmost concern. Actually, it produced a negative impact on the Indian economy from which it could not recover even after 1947.

Prior to the enactment of the Charter Act of 1813, all goods entering or leaving India had to be shipped by the British EIC. Such an institutional restriction (or the monopoly of foreign trade) went away with the passing of the Charter Act of 1813. Despite the level-playing field created by this Act, India’s trading links with the British world had no parallel till 1947.

The era of industrial capitalism covering the period from 1814 to 1858 saw the emergence of a trade policy popularly known as ‘free trade’ policy. Through this instrument of trade, Indian economy was made colonial and dependent economy based on world capitalism. Leaving aside this qualitative aspect of trade, let us take a look at the quantitative aspect of trade.

At the beginning, it must be remembered that, before 1834-35, trade statistics were inadequate to answer a lot of questions. This can be attributed to the different currency systems prevailing in Bengal, Madras, and Bombay through which the bulk of India’s sea-borne trade passed. Consequently, compilation of trade data on an all-India basis was virtually impossible.

Meanwhile, with the introduction of a uniform currency throughout India in 1835, as well as the availability and reliability of trade statistics of a continuous series, it became possible to calculate the growth rate in foreign trade. Between 1835 and 1850, the average annual rate of growth was 3.61 p.c. for exports and 5.61 p.c. for imports. Export growth rate almost doubled but remained less than that of imports in the next decade. Imports and exports recorded highest growth rates during 1834 and 1866, due to the Crimean War (1853-1856) and the massive expansion in railway network.

Although the volume of overseas trade continued to rise, the decadal growth rates were slowed down in the last quarter of the nineteenth century. The decade of 1890s was marked by stagnation in foreign trade due to the interplay of various factors. The table turned around 1900.

Rates of growth of exports and imports during the first decade of the twentieth century exceeded all nineteenth century ones, except for the 1850s. Not only the volume of trade expanded but also the value figures of trade bulged out possibly due to the rapidly rising price level.

Such growth in trade is attributed to the imposition of free trade policy with the objective of expanding market in India and to save her industries which were on the decline. Such policy freed India to accept British imports either at nominal duties or free while Indian manufactures were subjected to high import duties in England. This policy yielded a great dividend to our ruler. However, trade expanded significantly after 1845.

The outbreak of the First World War caused a great setback to India’s foreign trade, mainly import trade. This was so because during this period import was difficult to obtain. But in 1916 export trade recovered and reached the pre-war peak because of the large scale war, demand for Indian jute bags, hides and skins and other strategic materials.

However, this boom in export did not last long. On the other hand, during the war, imports declined by 67 p.c., mainly due to the disruption in the supply side following the World War I. After the World War I, there had been a tremendous spurt in imports mainly due to the overvaluation of exchange value of rupee. Though exports grew faster than imports after 1922, its growth rate slackened drastically after 1925.

The decade of 1920s experienced Great Depression in 1929. Its impact was so severe that decadal growth rate of trade turned out to be a negative one. Recovery occurred in 1933-34, albeit at a slow pace. Once again, the recessionary tendencies that erupted in the USA and lasted for two years (1937-39) halted the general recovery.

With so many uncertainties in the political arena of this country and the closure of overseas markets following the World War II, India’s foreign trade expanded both in volume and value. But high figures for exports and imports must not be the cause for jubilation because the rise in value figures was due to high inflationary price rise prevailing in the country. In other words, the actual state of foreign trade was not altogether satisfactory.

One of the important characteristic of foreign trade was the continuous presence of excess of exports over imports (from 1870-1939, except 1920-21 and 1921-22)—a situation called the favourable balance of trade. Unfortunately, this imposed unilateral transfer of funds on the country or made the terms of trade adverse to the country.

While referring its consequence, B.N. Ganguli stated that “the growth of India’s export trade has imposed a disproportionate burden on the agriculturists and forced them to sell ‘non-paying’ crops like cotton on unfavorable ‘real’ terms of exchange.”

Commodity Composition of Trade Since 1814

Composition of trade is a very important aspect of a country’s foreign trade. By analysing our imports we can see what are the things that we lacks and how much of them we need and are able to get. It also pinpoints those areas/items which account for a substantial portion of our total import bill. Then we can take proper measures. Composition of exports tells us about the things we have and how much of them we are willing to sell.

It also indicates those areas/items where proper emphasis needs to be given. Analysed over a period of time, the composition of trade reflects the development taking place in the internal structure of production and, above all, the level of development of the country concerned. Thus the structure and composition of exports and imports tell a lot about an economy.

The expansion of trade during the period under review may be construed as an advantage to any country. But because of the radical changes in the structure and composition of trade, the expansion of trade proved ruinous to Indian industry. In the eighteenth century, India was one of the biggest producers and exporters of cotton fabrics. But she slipped to a position of one of the largest consumers of foreign manufactures. She now saw the domestic market inundated with foreign imports.

The composition of India’s imports and exports underwent a radical transformation during the nineteenth century. Prior to 1813, she was primarily an exporter of manufactured articles and importer of bullion and luxury products. Such pattern of trade underwent a sea-change due to India’s colonial status, the bias being overwhelmingly towards the export of agricultural raw materials and food-grains and the import of manufactured goods especially cotton yarn and cloth. Possibly such shifts in export trade originated from outside.

Under the mighty impact of industrial revolution that took place in England in the mid-18th century, the cotton textile industry had been revolutionalised. Now a finer and cheaper variety of cotton cloth came to India which resulted in a major shift in the composition of export trade. Cotton piece goods, indigo, raw silk and opium were the principal export items between 1814 and 1850.

All these items taken together constituted 56 p.c. to 64 p.c. of the total value of trade. Among these, the disappearance of cotton manufactures was the most dramatic one. In 1811-12, the percentage share of cotton goods in total export value was 33 p.c. By 1850, it plummeted to as low as 3.7 p.c. Thus, the elimination of India’s textile industry from international markets was all but complete.

Same is true with indigo which lost its competitive edge due to rapid growth in the cultivation of dye plant in the West Indies in the early years of the 18th century. The percentage share of exports of indigo, though increased from 18.5 p.c. in 1811 to 2.7 p.c. in 1828, came down to 10.9 p.c. by 1850. The contribution of raw silk towards exports declined from 8.3 p.c. in 1811 to 3.8 p.c. in 1850. The percentage share of opium exports, though declined from 23.8 p.c. in 1811 to 10 p.c. in 1839, rose to a high of 30.1 p.c. by 1850.

Meanwhile, India’s traditional handicraft industries had been completely ruined by the ‘White’ ruler in the interests of British manufactures. Consequently, after 1850, cotton textiles and exportable items were gradually replaced by a variety of agriculture-related products, chief of them being raw cotton, raw jute, food-grains, manufactured jute goods, tea, seeds, hides and skins. India’s export trade before 1850 was narrow-based, having a bias on primary agricultural commodity. Now, after 1850, it became more diversified.

As is seen from the composition of exports after the second half of the nineteenth century, most of these exports were in the nature of agriculture-related commodities. But these items were “really in the category of semi-manufactures as many of them received considerable processing before they were internationally traded”.

Percentage share of exports of raw cotton in total exports fluctuated widely between 1850 and 1935. Its share was as low as 9.4 p.c. in 1900 as against 19.1 p.c. in 1850 or 35.2 p.c. in 1870. It rose from 9 p.c. to 21 p.c. in 1935. The percentage share of manufactured goods rose sizably from 0.9 p.c. in 1850 to 10.1 p.c. in 1900 but then it declined to 8.5 p.c. in 1935.

During the 50 years preceding 1914, greater part of India’s exports came to consist of food-grains like wheat, rice, and tea which regularly accounted for 10 p.c. to 20 p.c. of total export value. The single- most important cause giving rise to a phenomenal expansion of export trade of food-grains was the opening of the Suez Canal in 1869.

In addition, the British Government encouraged the export of food-grains by abolishing export duty on wheat. However, with the opening of the Suez Canal, the country witnessed an extraordinary expansion of India’s foreign trade. Its value rose from £ 90 million in 1868-69 to £ 200 million in 1913-14 and to £ 400 million before the onset of the Great Depression.

Whatever the reasons behind the high volume of exports of food-grains, it proved to be a blessing in disguise since food-grains export helped India to earn sufficient annual exchange balance to pay ‘Home Charges’. Large scale export of food-grains also determined the choice of crops that the cultivators would make.

Under the impact of rising export of food-grain, cultivators of the Punjab, Sind and North Western Provinces went for wheat cultivation. Bengal farmers extended the area for jute cultivation, while Madras farmers concentrated in the production of oilseeds.

Rising export of food-grains led to shrinkage in the demand for indigo and, in its place, commercial crops became important. However, a side effect was noticed in Berar region which witnessed a permanent deficit in food-grains. To tackle this, this region went for importation of food-grains against the sale of cotton and a variety of commercial crops.

It will not be out of place to point out here that the growth of Indian exports was assisted by the extension of internal trade and transport networks, mainly the railways after 1850. Coming to the import side, we can say that the composition of India’s import trade from 1850 to 1935 remained virtually stable.

For our purposes, we want to classify the structure of Indian imports into three groups:

(i) Foodstuff (such as coffee, Chinese tea, sugar, and spices),

(ii) Luxury goods (such as, Arabian incense and carpets and horses from Persia, wines and spirits), and

(iii) Mass consumption goods (such as, cotton textile, metal goods, paper, and glassware).

India’s import of goods fully manufactured constituted 61.9 p.c. of total imports in 1885 and that of goods partly manufactured came to roughly 80 p.c. In view of this, K. N. Chaudhuri commented that “the revolution in the commodity composition of imports was complete and the cotton manufactures had emerged as the single most important class of foreign goods consumed in the sub-continent”.

Such a change in the structure of imports had far-reaching implication. Hitherto, merchandise imports constituted an insignificant amount as they were mostly conspicuous consumption goods. But now cotton goods came to predominate in India’s import list. This meant that “India was now becoming dependent on foreign sources for the supply of the second-most important item of domestic budget, clothing. Although the proportion of imported cloth in total domestic consumption was likely to be small in India before 1840, the rate at which the trade in piece goods expanded could mean that by the 1860s Britain was supplying a substantial part of the entire Indian market. It is clear that the British manufactures encountered little competition in this branch of trade, and the importance of cotton exports to India which compared nearly 60 per cent of total British exports to the sub-continent, can scarcely be exaggerated”.

Cotton piece goods constituted 31.5 p.c. of the total imports in 1850. It rose to 47 p.c. in 1870. However, the rate of expansion since then slowed down and its share in total imports dropped to as low as 26.4 p.c. in 1920. Other important import items were cotton twist and yarn, metals, railway materials, and, after 1880, mineral oils. Most of these imported articles were mainly consumer goods where Great Britain enjoyed a comparative advantage in production. This is true of intermediate goods like cotton yarn and twist, railway materials.

Fortunately, for these imported articles, an import multiplier, of course in an indirect manner, came into operation. Such import multiplier very rightly stimulated the country’s economic growth. For instance, declining handloom textiles received a forward push from the importation of fine yarn.

Above all, railway construction, even with the imported railway materials, acted as a fore-runner of growth. Infrastructural bottlenecks had been greatly removed. But, there is another story that a faithful observer of the Indian economy cannot ignore. This can be summed up in the words of the great historian Tara Chand: “Competition with imported goods destroyed the Indian industry, deprived the artisan of his income and narrowed down the avenues of employment for labour. On the other hand, the exports which came to consist of raw cotton, raw silk, food-grains, opium, indigo, and jute denuded the country of her agricultural surplus, raised the prices of raw materials and laid the foundation of future agricultural shortage and famines which held the country in their grip over the next hundred years. Foreign trade in India was, thus, an instrument of exploitation of the resources of the country and her economic enslavement”.

Direction of Trade

The dynamism in India’s foreign trade is reflected in its direction. India had a trading link mainly with Great Britain, since it retained a virtual monopoly of all the European trade. In the early years of the British rule in India, rival traders of Holland, France, and Portugal were ousted. Great Britain’s predominance in the realm of foreign trade is explained in terms of interplay of various factors.

These are: investment of British capital in various fields, the management of Indian industries through British managing agency houses, the management of railways, shipping and banking companies by the Britishers, and the policy to discriminate favouring Britain (especially after 1932) and against other trading nations, and Britain’s entre-pot trade in Indian produce which she distributed among the European trading partners. Before 1857, more than 50 p.c. of India’s trade were tied with Great Britain.

The share of Great Britain in imports and exports in 1875 were 83 p.c. and 48 p.c., respectively. Taking imports and exports as a whole, Great Britain share came to about 62 p.c. in 1875. But, Great Britain could not maintain her supremacy as time rolled on. For instance, at the close of the 19th century, Great Britain contribution to the import trade declined to 69 p.c. and to 64.2 p.c. in 1913-14.

On the other hand, the share of the Great Britain fell from 29 p.c. in the early years of the 20th century to 24 p.c. in 1913-14. Overall, the share of the Great Britain in India’s foreign trade declined from 62 p.c. to 41 p.c. in 1913-14.

The countries which gained following a declining share of England were Germany, Japan, and the United States. These countries registered commercial ties with India. As the share of Great Britain in import trade went on declining from 83 p.c. in 1875 to 64.2 p.c. in 1913-14, Germany increased her share from 2.4 p.c. to 6.9 p.c., the USA from 1.7 p.c. to 2.6 p.c., and Japan from less than half percentage point to more than two and half percentage points.

Though Britain’s share in export trade declined to 24 p.c. by 1913-14, Continental European countries were able to seize the opportunity and raised their shares to 29 p.c., the USA to 9 p.c. while Far Eastern countries witnessed a fall in share in export trade. Individually, Germany and Japan became the second and third in the list of buyers of Indian goods in 1914. However, China was pushed from second place to sixth place.

As far as imports were concerned, Great Britain again lost some ground during the World War I years, mainly owing to her preoccupation with the War. The share of the British Empire in imports declined considerably from 70 p.c. in the pre-World War I period to 54 p.c. in 1928-29.

Of these, the share of Great Britain declined from 63 p.c. to 45 p.c. over the same time period. Japan, Germany, and the USA increased their shares from 2.5 p.c. to 10.6 p.c., 6.4 p.c. to 8.1 p.c. and the USA from 3.1 p.c. to 10.2 p.c. Owing to the non-involvement of Japan and the USA in the World War I in the initial years, the control exercised upon India’s export trade and the restrictive influence of high prices then prevailing in Great Britain gave a unique opportunity to the US and Japan to emerge as growing trading partners of India.

Mainly, these countries filled up the gap left by the decline of UK’s share in Indian imports. These countries became the important suppliers of iron and steel, hardware, cotton piece goods, metallurgy, etc., which had been hitherto imported from the United Kingdom.

However, the World War I reversed the pre-war tendency at least temporarily. Unlike imports, direction of exports was also drifting away from Great Britain. The share of the British Empire in India’s exports declined from 41 p.c. in 1913-14 to 35 p.c. in 1928-29. The share of Great Britain declined also from 25 p.c. to 21 p.c. during the same time period. Though Germany’s position remained almost stationary, the USA and Japan consolidated their position.

An idea about India’s direction of trade or geographical distribution of trade for the period 1860-61 to 1940-41 can be obtained from Table 6.2.

India’s foreign trade received a great shock under the impact of the Great Depression. During the depression years, the British Empire as well as Great Britain witnessed a declining trend in their share of import. However, as far as exports from India were concerned, Great Britain and the British Empire greatly recovered their position.

The adoption of the Imperial Preference following the Ottawa Agreement in 1932 aimed at diverting Indian exports towards Great Britain and the British Empire. Though the share of Great Britain in imports into India declined from 35.5 p.c. in 1931-32 to 30.5 p.c. in 1938-39 in spite of Imperial Preference, her share in exports registered a massive increase from 44 p.c. to 54 p.c. Though Germany improved her position slightly, the comparative superiority of the USA in the share of imports was shattered.

The direction of India’s foreign trade during the Second World War was marked by the following features:

(i) Gradual eclipse of Great Britain share;

(ii) But gradual increase in the share of the Empire countries;

(iii) Eclipse of Germany and Japan in the Indian market; and

(iv) A rise in trade with the USA, Middle East, and the Far East.

Anyway, the geographical distribution of trade that had changed over time resulting in an alternating rise and fall of one or two countries must be attributed to the changes in the commodity composition of trade. With the emergence of new exports and imports following industrialisation as well as reorientation of the agricultural sector, we saw countries like USA and Japan to emerge as the growing trading partners.

As Great Britain lost her comparative advantage in the export and import trade, other countries established their superiority, though the overall share of the British Empire was too large since India was the most lucrative colony of England. Monopoly position in trade explained her superiority.