Trade Policy, 1800–1947

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TRADE POLICY, 1800–1947

TRADE POLICY, 1800–1947 Defined either narrowly or broadly, the trade policy of the British government of India did not promote the interests of most Indian producers or consumers. Narrowly defined, trade policy refers to government rates of tariffs, duties, quotas, trade agreements, and other policy instruments that affect the price and quantities of goods exported and imported. Broadly defined, trade policy incorporates all government policies that influence a country's terms of trade, defined as the price of its exports relative to its imports. Such policies would include those targeting changes in exchange and interest rates, investment incentives, taxation and expenditure policies on tradable commodities, and nontariff barriers to trade, such as preferential treatment in government purchases. British imperial rule had many adverse consequences for India's international economic relations.

The British Raj had no consistent trade "policy" until the mid-nineteenth century. The three British East India Company presidencies of Bengal, Bombay, and Madras had operated largely independently and had adapted to a varying range of pre-colonial trade systems. For example, Mughal tariff rates often varied from 2.5 to 5 percent, depending on the region and the traders' community affiliation. Over time, the British consolidated the indigenous systems of inland and external customs rates of the eighteenth century.

By the time the East India Company's administration had solidified its hold over Indian territory, an all-India trade policy emerged. From 1846 the British Raj instituted a uniform tariff rate schedule: 3.5 percent on cotton twist and yarn, and 5 percent on all other goods imported from Britain. For imports from all other countries, the rates were double. The policy clearly favored Britain among India's numerous trading partners; yet it did not impose unique advantages to British industrial sectors over their Indian counterparts. However, what began as a simple, nonprotective tariff regime evolved during the late nineteenth century into a rigid reflection of the interests of British manufacturing and political interests.

Unlike many governments of the time, the British government of India did not rely upon import and export duties for the bulk of its revenues. In colonial India, the lion's share of revenues came from land taxes, a regressive tax regime retained from Mughal administrations. As fiscal expenditures outpaced revenues, the Raj looked to import duties as an expedient way of raising public revenues. In 1860 the rates on twists and yarn rose to 5 percent. For all other goods, the rates doubled. While this did provide additional income for the government, raising import tariffs also had the effect of raising the price Indian consumers paid for imported goods relative to those produced domestically. British cotton manufacturers cried foul. The Manchester Chamber of Commerce put enormous pressure on the Raj to lower rates, claiming that the government had unfairly favored Indian cotton goods producers to the disadvantage of British firms. Manchester's lobby found a sympathetic audience with Lord Salisbury, secretary of state for India in 1875. By 1882 all cotton import duties were abolished. When fiscal necessity prompted the reimposition of an import duty of 3.5 percent in 1894, the government again appeased British industrialists with an equivalent excise tax on Indian cotton textile production. These excise duties, which remained in place until 1925, galvanized political opposition to the notion that the imperial government could serve as a loyal steward of India's domestic economy.

For good reason, cotton textiles are symbolic of India's international trading relationships in the period. Between 1840 and 1865, the principal commodities of import included cotton twist and yarn, cotton goods, machinery, raw metals (particularly copper and iron), metal manufactures, and railway materials. Between 1870 and 1895, India was the biggest customer of Britain's Lancashire cotton industry. By 1920, imports included cotton manufactures, sugar, iron and steel, machinery and millwork, and mineral oils. Indian imports were more technologically advanced and had greater value-added than Indian exports. For basic industrial inputs—machinery, metals, and chemicals—India depended upon overseas production. Moreover, 90 percent of all India's imports in 1919–1920 originated from the United Kingdom. During the Great Depression, the British abandoned free trade orthodoxy and built huge tariff barriers to trade. In 1930 the British government of India passed the Cotton Textile Protection Act instituting duties of 15 percent for all British goods and 20 percent for all non-British imports. By 1931 both of these rates rose by 5 percent. The justification again was fiscal necessity, not protection of Indian industry. Most commentators, however, have concluded that the intent was simply to redirect India's foreign trade toward England. In the depressed economic environment of the 1930s, the Raj discouraged trade with other major textile producers such as Japan. The case of cotton textiles thus illustrates how the concerns of Indian consumers and producers were overridden by the special interest groups within the British Empire. British India's primary economic interests were abandoned in favor of overt "imperial preference" and bilateral agreements.

India's other major import was silver. Reportedly, Indian imports of silver accounted for a third of world silver production in the last three decades of the nineteenth century. According to the Statistical Abstract relating to British India (various years), precious metals accounted for approximately one-fifth of the value of India's total imports. Part of India's seemingly insatiable demand for silver was for private consumption purposes, sometimes called hoarding. Another part was converted into currency. In either case, the vast majority of the population preferred to accumulate their savings in the form of precious metals, which in times of distress could be easily converted into the official silver-based rupee. Government mints were open to the public until 1893 and charged modest commissions. Thus if the intrinsic value of the silver in the Indian rupee exceeded the exchange value of the coinage, then the government could anticipate a rise in the public's willingness to liquidate private stores. With a glut of silver on world markets, India's silver currency rapidly depreciated from 1876 to 1893. This illustrated the vulnerability of India's exchange rate, unmanaged by a central bank until 1935.

While the government of British India did have some policy instruments (in the form of counsel bills and reverse counsel bills) to affect the value of the rupee, the government developed no independent, central institution to integrate India's money markets and govern monetary policy. For most of the colonial period, the value of the rupee and its consequent impact on trade relations was left to world market forces. When the value of the rupee plummeted, Indian exports were given a huge boost.

Opium, indigo, sugar, and raw cotton were the major commodities exported by India in 1849. By 1920 exports remained overwhelmingly basic, unfinished commodities: raw cotton, jute manufactures (mainly gunny sacks), raw jute, raw skins and hides, and tea. Although from 1865 to 1920 Britain's share of Indian exports fell from 67 percent to 22 percent, on the eve of its independence India's economy resembled a classic third world economy, producing inelastic agricultural goods for a competitive world market and importing more expensive manufactured goods. Commodity imports exceeded exports by nearly 12 to 1.

Economic wisdom about protection and regulation of trade has changed considerably since the colonial period. While free trade has become the mantra for economic growth since around 1980, in the late nineteenth century many nations, including the United States, actively protected their industries. Protective duties on imports were considered essential for the nurturing of infant industries and at the same time provided a means for governments to reward important constituencies. Few economic historians would deny that India's nascent steel and paper industry got a healthy start thanks to interwar trade barriers. However, it remains an open question whether the absence of tariff protection before 1914 actually hurt the mature Indian textile sector. New research suggests that Indian craft industries, including hand-loom textile production, continued to thrive in the colonial period. Modern machine production was not always a substitute for traditionally processed textiles due to the breadth and segmentation of the textile market. It is possible that free trade may not have hurt Indian producers before 1914, but it certainly did help British producers compete on world markets. For the rulers of British India, free trade held ideological charm, but it often proved contradictory to the necessities of colonial administration.

Santhi Hejeebu

See alsoBalance of Payments: Foreign Investment and the Exchange Rate ; Economic Policy and Change, 1800–1947


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