Historically, fine cotton produced in India were exported to Europe. With industrialization, British cotton manufacturer began to expand, and industrialists pressurized the government to restrict cotton imports and protect local industries. Tariffs were imposed on cloth imports into Britain. Consequently, the inflow of fine Indian cotton began to decline.
From the early nineteenth century, British manufacturers also began to seek an overseas market for their cloth. Excluded from the British market by tariff barriers, Indian textiles now faced stiff competition in other international markets. If we look at the figures of exports from India, we see a steady decline of the share of cotton textiles: from some 30 percent around 1800 to 15 per by 1815. By the 1870s, this proportion had dropped to below 3 per cent.
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What, then, did India export? The figures again tell a dramatic story. While exports of manufactures declined rapidly, export of raw materials increased equally fast. Between 1812 and 1871, the share of raw cotton export rose from 5 per cent to 35 percent. Indigo used for dyeing cloth was another important export for many decades. Optimum shipments to China grew rapidly from 1820 to become for a while India’s single largest export. Britain grew opium in India and exported it to China and, with the money earned through this sale, it financed its tea and other imports from China.
Over the nineteenth century, British manufactures flooded the Indian market. Food grain and raw material exports from India to Britain and the rest of world increased. But the value of British exports from India. Thus, Britain had a ‘trade surplus’ with India. Britain used this surplus to balance its trade deficits with other countries – that is, with countries from which Britain was importing more than it was selling to. This is how a multilateral settlement system works – it allows one country’s deficit with another country to be settled by its surplus with a third country. By helping Britain balance its deficits, India played a crucial role in the late-nineteenth-century world economy.
Britain’s trade surplus in India also helped pay the so-called ‘home charges’ hat included private remittances home by British officials and traders, interest payments on India’s external debt and pensions of British officials in India.