Trade | East India Company | Exports

ABSTRACT: SUBMITTED TO Dr .MANOHAR RAO DEPT. OF ECONOMICS UNIVERSITYOF HYDERABAD.

TOPIC: TRADE AND BALANCE OF PAYMENTS BY: SRILATHA O6ISME10 I.M.A (ECONOMICS)

Introduction: Before 1947 when India was a colony of the British the pattern of her foreign trade was typically colonial, India was supplier of foodstuffs and raw materials to the industrialized nations particularly England and an importer of manufactured goods. This dependence on foreign countries for manufactures did not permit industrialization at home rather as a result of the competition from British manufacturers the indigenous handicrafts suffered a severe blow. With the dawn of independence, the colonial pattern of trade had to be changed to suit the needs of a developing economy which decides to embark on a programme of development is required to extend its productive capacity at a fast rate. For this, imports of machinery equipment which cannot be produced in the initial stages at home are essential Foreign trade of India during the pre-independence period: Before the Second World War India was forced to export than its imports in order to meet the unilateral transfer of payments to Britain in the shape of salaries and pensions of British officers, interest on sterling loans and dividends on British capital invested in India. During the Second World War there was a basic change in the nature of India’s international trade. She began exporting to Britain large quantities of goods but the engagement of Britain in the war did not permit her to export to India adequate quantities of goods in return. Such

unrequited exports gave rise to sterling balances. Thus more exports and less Imports which was the feature of India’s foreign trade helped the growth of a favorable trade balance. The balance of trade was so favorable with Britain—the principle customer of Indian goods—that even after paying off the sterling debt, India was able to build huge sterling balance amounting to RS.1,733crores in April 1946. Besides the wars afforded a natural umbrella of protection and this facilitated the growth of consumer goods industries in India. A vacuum was also created in the countries of the Middle East and Far East and consequently India was able to develop markets for her manufacturers in these countries and import raw materials to feed her growing consumer goods in India. The pattern of exports: The value of exports and imports had both been on the increase during 1938-39 to 1947-48 although exports were consistently higher than imports. The commodity structure of exports also underwent a change. Whereas the raw material component of exports declined from 45 percent of total exports in 1938-39 to 31 percent in 1947-48, the share of manufacture of articles improved from 30 percent in 1938-39 to 49 percent in 1947-48. So far as food was concerned India did export in pre war years some wheat, floor, barley and pulses, but with a rapidly increasing population, the surplus had completely disappeared in the post independence period. Foreign trade of India during 1938-39 to 1947-48.

Year 1938-39 1945-46 1946-47 1947-48

Exports 169 266 319 403

Imports 152 245 288 389

Trade balance 17 21 31 14

Trade development from 1757-1813: In the mid 18th century the foreign trade of India appears to have been mainly in the hands of three groups of merchants and traders. The trade with Europe was conducted almost exclusively by European chartered companies of which the English and Dutch east India companies were the most powerful, though the French company was not very far behind by this time. Most of these companies enjoyed statutory national monopolies giving considerable protection to their domestic markets. The second group consisted of Foreign Asian merchants such as Armenians and Arabs largely engaged in the trade with Middle East. The third group was made up of native Indian merchants. The most active and enterprising of these were to be found in the Gujarat, particularly in the great emporium of trade, Surat which was always referred to in the early years of the century as the treasure house of India. But in the 1750’s in terms of overall volume of trade, wealth, and influence the English certainly occupied a commanding position at least in Bengal, which was by now the premier trading province of mughal India. The immediate consequence of the recapture of Calcutta in 1756 and the revolution in the government the next year was to strengthen immensely the political position of the English East India Company. However, once the East India gained control of the public revenues of the province, the need to import bullion from Europe lessened,

and the surplus from budgetary sources could be utilized to provide the annual investment. In fact Bengal was not only expected to supply the export goods to Europe but also the silver to finance the company’s purchase tea and silk in china. By the 1780’s both East India company’s servants and private British traders has succeeded in establishing a position of dominance in the maritime trade of Bengal, madras, and Bombay and had generally greatly reduced the share of the native merchants in the exports and imports trade. Other European groups did better partly because they had an independent economic base to operate from and partly because of a special reason after the battle of Plessey there was suddenly and enormous increase in the amount of private fortune belonging to the company’s servants who wished to send it to England at a profitable rate of remittance. In the period from 1765-1786 was the great period of private trade by the East India Company’s and servants, such excesses were gradually checked with the improvement in the company’s administration in India and its increasing control by the parliament. In 1776 Adam smith had condemned the company’s monopoly as being both detrimental to British foreign trade, as well as destructive to India’s economic welfare. In a lengthy memorandum written in 1792 for the board of control an attempt was made to estimate the total volume and value of India’s direct trade with Europe. A summary of it is given in the below table it shows that the company’s share of European exports to India was only 14.4% of the total value, while that of imports from India came to 26.8%. TRADE BETWEEN INDIA AND EUROPE ESTIMATED ANNUAL AVERAGE 1780-90 Imports in to India(£) 992,640 615,300 439,600 346,070 (%) Exports from India(£) 41.5 2,757,763 25.7 2,000,000 18.4 403,565 14.4 1,962,095 208,146 100 7,331,569 (%) 37.6 27.3 5.5 26.8 2.8 100

Foreign companies: Dutch, French, Danish, Portuguese Clandestine trade: English trade under foreign flags English private trade: licensed by the East India Company East India Company Privilege goods shipped on the company's ships Total

2,393,610

Trends and fluctuations: total exports and imports, 1814-1947.
With the charter act of 1813 which removed some the chief institutional restrictions and anomalies, India overseas trade began to take on a more recognizably modern character. The immediate effect of the opening of trade was a spectacular expansion, and the long term trends through out the 19th century were in an upward direction. The general progress however, occurred in a series of uneven spurts and the whole period was punctuated by short fluctuations it is well known as the change in the techniques of

production of brought about by the industrial revolution gave rise marked oscillatory moments in overall economic activity. Thus the occurrence of regular business cycle is some times described as one of the distinguishing marks of a capitalist economy and the second half of the 19th century saw the great period of booms and slumps. The general development in the course of trade between 1813-14 and 1828-29 is presented in the below table. Owning the different currency system prevailing in Bengal, Madras, and Bombay- the three provinces through which the bulk of India’s sea born trade passed-it is not possible to compile all India totals before 1834-35.

External trade of Bengal: Export Imports Index (million (million Rs) Rs.) Merchandis Treasur Total Merchandis Treasur Total Exports Imports e e e e Merchandis Merchandis e e 1813- 46 0.04 46 15.8 5.8 21.6 100 100 14 1814- 47 0.15 47 15.6 11 26.8 102 99 15 1815- 56 0.02 56 16.5 20 36 122 104 16 1816- 61 0.17 61 20.6 41 61.9 132 130 17 4 1817- 65 0.32 65 29.7 33 62.8 140 188 18 7 1818- 58 0.3 59 29.7 50 79.2 126 188 19 1819- 54 6.65 61 17.5 41 58.6 117 111 20 1820- 57 1.23 58 22.5 24 46.6 122 142 21 1821- 54 12.4 66 25.9 22 48.1 116 163 22 1822- 62 5.2 67 26.9 17 44.2 133 170 23 1823- 51 12.3 63 26.2 13 39.4 109 166 24 1824- 53 3.5 56 28.7 12 40.8 113 182 25 4 1825- 57 0.14 57 21.5 15 36.6 122 136 26

1826- 51 27 1827- 60 28

1.11 4.5

52 64

21.8 28

13 14

34.4 110 42.2 128

138 177

The worst year for the imports for example was 1833-34, while that of the exports was 1831-32. Again, the rate of recovery which began in 1835-36 was much less marked in the case of imports. A detailed analysis of the trade figures for this period indicates that the actual volume of trade fell less rapidly during the height of the depression than the value. Thus the price moments were largely responsible for the fall in export values. Import prices also seem to have declined, but again less than those of the exports, conforming even at this early date. The experience of recent years which shows that in a trade depression, the price of manufactured goods fall less fast than those of primary commodities. The years of highest growth for exports and imports seem to lie between 1834 and 1866, particularly the decade following 1850. Total value of India’s foreign trade from 1834-65(thousand of rupees) Year 1834 1835 1836 1837 1838 1839 1840 1841 1842 1843 1844 1845 1846 1847 1848 1849 1850 1851 1852 1853 1854 1855 Imports 42,611 47,818 55,369 50,324 52,409 58,312 84,159 77,885 76,036 88,177 107,540 90,874 88,966 85,976 83,448 102,998 115,587 122,404 100,708 311,226 127,426 139,434 Exports 79,934 111,064 132,401 112,427 117,747 108,627 134,555 138,252 135,518 172,534 165,902 170,286 153,554 133,123 160,885 173,122 181,641 198,792 204,646 192,951 189,272 230,392 Index imports 100 112 129 118 122 136 197 182 178 206 252 218 208 201 195 241 271 287 236 261 299 327 Index exports 100 138 165 140 147 135 168 172 169 215 207 213 192 166 201 216 227 248 256 241 236 288

1856 1857 1858 1859 1860 1861 1862 1863 1864 1865

141,945 152,776 217,285 242,651 234,937 223,204 226,323 271,455 281,509 295,992

253,384 274,560 298,628 279,602 329,706 363,170 478,596 656,254 680,270 654,911

333 353 509 569 551 523 531 637 660 694

316 343 373 349 412 454 598 820 851 819

The First World War effected India’s import trade more than exports the cessation of trade with the enemy countries and the dislocation of market in Britain, France and Belgium and cost and immediate decline in both import and exports. But even exports began to recover from 1916 and by the end of the war had once again reached the pre war peak. Last scale government orders for jute bags, hides and skins for manufacture of army boots, and other strategic materials, greatly stimulated exports and gave a positive encouragement to India industries. Imports on the other hand not only lack behind in their rate of recovery but actually continue to decline in volume. In 1919 and 1920, imports broke through all previous records and for the first time actually exceeded the value of export. A part fro accumulated demand in Indian markets the exchange rates were exceptionally high in these years which cause the importers in India to place big order for replacement machinery and immense quantities of foreign manufacture goods. These inflated import values account for the very high growth rate in this war decade. The rival in exports was less dramatic, due to number of reasons. And the outbreak of Second World War still saw the total value of Indian trade far below the pre depression figures. However, the war in spite of bringing many political uncertainties to India’s economic future and closing a substantial part of her overseas markets, increase the value of both import and exports. As we see from the below table in 1945-46 the general level was substantially higher than in the 1930’s. In view of severe inflationary trends in India during the war these figures must obviously be treated in with some care and we cannot be sure from mere value figure what the actual state of foreign trade was in these years. It must also be remembered that almost every country with which India has trading relations imposed the complicated network commercial restrictions including India himself falling the out break of war. year 1943-44 1944-45 1945-46 imports 1,177,671 2,035,865 2,404,853 exports 1,998,798 2,110,511 2,403,883

Commodity composition: Structure of exports and imports,1814-1947.

The importance of foreign trade to a country’s domestic economy depends as much on its total magnitude as on the structure and composition of its exports and Imports. However in recent years one of the persistent criticisms of the anti imperialist school of thoughts has been directed against the application of the classical trade theory to the colonial and underdeveloped countries, as leading to increasing and optimal economic gain. The extent to which the export of primary commodities can contribute to a country’s general economic welfare depends on a number of factors. From a structural point of view the most important of these is their relative position in the rest of the economy. It is obvious that the effect of instability in international demand will be significant, the greater the share of exports in total national income and the larger the proportion of the output of individual commodities explored relative to domestic consumption. Between 1814 to 1850 four commodities dominated exports. These were indigo, raw silk, opium, and cotton, and they accounted for 56-64% of total value. The second half of the century saw the emergence of new items, such as food grains, jute, oilseeds, tea, hides and skins and manufactured cotton goods. It is clear that in the earlier period, India’s export trade was much more narrowly based, while it became more diversified later with the relative share of each group becoming more evenly balanced. Although most of these exports can be classified as primary commodities, it will be seen that they are really in the category of semi manufacturers as many of them received considerable processing before they were internationally traded. During the fifty years preceding 1914 India possessed very large export trade in food grains which regularly accounted 10-20% of total export value. In peak years, such as 1891-92 and 1904-15 their share was 26.5 and 26.1% respectively. A large proportion of this trade was admittedly claimed by Burma which became one of the major world exports of rice, and the share of the latter in total food grains exported from the sub-continent varied from 94% in 1870-71 to 58.4 in 1913-14. but even so, Indian wheat and other secondary crops played an important role in the international grain trade of this period, and between 1881-82 and 1891-92 their share was often equal to, or exceeding to that of rice. The most important single factor responsible for giving rise to both the export of Burmese rice and Indian wheat was the opening of the Suez Canal which not only reduces the cost of shipment but also prevented the derivation in the equality of the grains by cutting down the duration of the voyage of Europe. There were other contributory causes as well, and it has been pointed out that the government deliberately encouraged the export of food grains from India by repealing the export duty on wheat in 1873 & generally facilitating the contribution of railways between the port towns and the wheat lands of northern India. wheat quantity raw jute value 0.89 2.9 19.8 43.7 jute manufacturers value 2.1 3 2 12

year 1850-51 1860-61 1870-71 1880-82

0.078 2.2

value 8 11 0.3 11

quantity

quantity

3.7 6.7

1890-91 14.3 1900-1901 0.05 1910-1911 25.3 1920-21 1.2 1930-31 3.9 1940-41 0.9

60 0 130 41 2 5

12 12.4 12.7 9.4 12.4 4.8

76 108.7 154.9 163.6 128.8 78.4

25 79 170 530 319 245

EXPORT OF WHEAT, RAW JUTE , JUTE AND JUTE MANUFACTURERS(RS.MILLION) THE GRAPHICAL DISTRIBUTION THE PATTERN OF SETTLEMENT: One of the remarkable features of world trade in the 17th and 18th centuries was the raise in the volume of commerce between Europe and Asia, made possible by the discovery and the working of the American silver mines which greatly increase international liquidity. By the mid 18th centaury the European share of India’s foreign trade had become at least as important as those of the middle and Far East. The east India Company’s conquest of India and its tightening grip on the overseas trade of the country naturally facilitated the continuation of this trend until in the first quarter of the 19th century the increasing pace of the industrial revolution gave a fresh impetus to the expansion of European trade with Asia. However, during much of this period India’s direct trade with Europe was dominated by Britain. After 1814 with the abolition of the companies Indian Monopoly the need to remit private fortunes and trade indirectly lessened and with it the previously large trade of continental countries. Thus until the appearance of new exports in the 1860’s the geographical distribution of Indian trade was divided between Britain and Europe along the Red Sea and the Persian gulf area, china and straits settlements. The actual percentage share of these areas can be seen from below table for the period 1828-40. While Britain was supplying between 65-70 % of India’s total imports in these years, it’s share of exports was only 40% on an average. So far as the exports are concerned, China was almost as important to India as Britain until the decaling of the opium trade towards the end of the centaury, although china supplied only about 10% of total imports. Both the absolute level of trade to India’s principle over seas markets and the latter relative shares in the total values were determined by the volume and weight four older exports such as indigo, opium raw cotton, raw silk, while the predomination of cotton goods and metals among the imports gave Britain a correspondingly larger share. For the domestic produces of export goods the geographical distribution of trade and the fluctuations in individual markets where obliviously of great importance in determining the level of output. But they were of even greater importance from the point – of –view of India’s overall balance of payments and the pattern of international settlements. BRITA IN CHIN A ARABIAN AND PERSIAN GULFS PENANG AND THE STRAIT SETTLEMENTS FRAN CE

Y EXPOR IMPO EXPO IMPO EXPO IMPO EAR T% RT % RT RT % RT % RT % 1828 48.2 -29 1831 36 -32 1834 41.2 -35 1837 39.5 -38 1839 57.1 -40 65 66.3 65.1 66.5 75.7 % 25.4 39.6 36.6 37.8 10.1 13.8 10.8 13.3 9.1 3.6 7.2 10 5.6 8.4 7.5 6.2 9.2 6 5.8 5.8

EXPO IMPOR RT % T% 6 4.1 5.3 5.1 10 4.2 5.5 6.3 6.5 5.1

EXPOR IMPOR T% T% 5.8 2.6 5.1 3.1 6.4 5.3 1.3 3.2 2.8 2.8

BALANCE OF PAYMENTS AND FOREIGN EXCHANGE: An unusual characteristic of India’s foreign trade through out the period of this survey was the existence of the large export surplus, which was not offset by either a rise in her foreign exchange reserves or an increase in overseas lending. In fact, the permanently favorable balance of trade, after including movements of treasure, was accompanied by a net import of capital after 1850. After the charter act of 1813 Britain relinquished the previous claims for tributary payments from India in the sense of creating budgetary surpluses and then remitting the whole of the surplus to Britain. Instead, the East India Company was required to pay for establishment costs incurred in England out of the public revenue raised in India and a nominal payment of £500,000 to the stockholders of the company. The total size of these payments varied from £1.5- £3.5 million before 1850. To these must be added any extraordinary claims made in individual years for liquidating parts of the company’s public debts payable in England. India also had negative balance in regard to most other service items and short-term capital movements. The various components on the debate side of her current account can be summarized as (a) payments of government external obligations, (b) transfer of private saving and the profits of European firms, and (c) invisible service charges such as freight on shipping, insurance and banking commissions. It is obvious that these debit items were financed throughout the export surplus on merchandise account, and latter, when railway constitution started on a large scale in India, through capital import. Until 1833 the east India Company followed a cumbersome method in remitting annual home charges. This was to purchase export commodities in India out of revenues, which were then shipped to London and then proceeds from their sale handed over to the home treasury. The outflow of gold from India which occurred in the 1930’s was attributed by some economist not only to the deterioration in the commodity balance of trade and the existence of heavy capital payments to Britain for home charges and invisible services, but also to a policy of keeping the rupee overvalued in terms of sterling. For, in common

with the rest of the world, India experienced great difficulty in maintaining stability in her foreign exchange. The smooth working of the gold exchange standard was thrown into confusion by the war by a combination of two complementary factors. From 1916 the bimetallic ratio began to fall in the international market and by next year the price of silver had risen to the point where it was becoming very costly for the government of India to maintain the silver reserves and thus the convertibility of rupee against both paper currency and gold. Secondly, the balance of trade had turned so favorably to India that the secretary of state found it difficult to meet the entire demand of trade for council bills, and restricted their sales. The result was immediately seen in a divergence in the open-market rates for the rupee and the official exchange rate of 1s.4d. Ultimately, the government abandoned the policy of keeping the exchange rates fixed under the rupee roused to 2s.4d. In 1919. There after until 1927 the rupee continued to float in spite of various official attempts to stabilize exchange. As we have already seen, the high exchange rate was not long lasting and in 1921 it had fallen to 1s.3d. The improvement in balance of trade slowly raised it again to 1s.6d. In 1925, the year in which the government appointed the Hilton young commission to examine the whole series of problems content with the Indian monetary system. The commission recommendations were published next year and some of them implemented by the currency act of 1927. The rate of exchange for the rupee was fixed at 1s.6d. And it was linked to both gold and sterling. After Britain went off the gold standard in 1931, the rupee was simply linked to sterling and the operation of the foreign exchange taken over by the newly created central bank, the reserve bank of India in 1933. these frequent changed in Indian currency and exchange policy in the inter-war period, of course, reflected the uncertain of the world monetary system and gave rise to large body of controversy views which, however need not detain us here.

CONCLUSION: foreign trade is an “engine of growth” it helps a country to utilize its
natural resources and to export its surplus production. Before independence India was forced to export more than its imports in order to meet the unilateral transfer of payments. During Second World War there was basic change in the nature of India’s internal trade. The goods were exported to Britain. Thus more exports and less import were a feature of India’s foreign trade which results in growth of a favorable trade balance. The value of imports and exports both increased during 1938-39 to 1947-48. After independence when India launched 1st five year plan its foreign trade underwent good deal of change. Therefore after independence there is increase in foreign trade

REFERENCES:

BIBILIOGRAPHY Cambridge economic history of India from

1757-1970 by Dharma Kumar & T.N CHAUDHURI  The economics of development and planning BIBILIOGRAPHY:

PANDIT, Y.S India’s balance of indebtedness

1893-1913(London, 1937)  K.N. CHAUDHURI The economic development of India under east India Company.  Hamilton, C.J. The trade relations between England and India 1600-1696(Calcutta.1919)

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