Unit 2

Foreign Trade of India

2.1 Foreign trade of India before independence

Foreign trade refers to buying (import) and selling (export) of goods between/among the countries. India was also involved in cross border trade from ancient period with its neighbouring countries by exporting jewellery made of gold and silver, brass, copper and bell metal wares, marble work, carving works in ivory, wood, stone, artistic glassware, Shawls and carpets from Kashmir and Amritsar, silk sarees of Banaras and silk cloth of Nagpur etc. But during British colonial rule, the scenario has changed as Britain held the monopoly of over India’s imports and exports. In 1869, the beginning of the Suez Canal increased the British authority over India’s foreign trade and it became a supplier of raw materials like jute, cotton, indigo, wool, sugar etc. and importer of finished consumer goods like silk and woollen clothes and light machinery manufactured in the factories of Britain. Most of the foreign trade was restricted only to Britain and only a small share of trade was allowed with other countries like Ceylon (Sri Lanka), China, and Persia (Iran). They formulate foreign trade policies to drain wealth from Indian economy. The scenario of foreign trade of India during the British colonial rule (1757 to 1947) are discussed under the following two heads-

The initial period (1757-1857): during this period, British East India Company was trying to set up their industrial base in India. During that period, foreign trade of India was mainly conducted by the English, Dutch, French, and Portuguese traders and merchants. Gradually British East India Company monopolized the trade of India and ousted the other merchants and traders. The exports were mainly calico, spices and foodstuff and other raw materials for precious bullion (i.e., gold and silver) imported from Europe. From 1814 the composition of trade India was changed where India became the mere exporter of agricultural products and raw materials and importer of finished manufactured articles from Britain. Cotton piece goods, indigo, raw silk and opium were the principal export items between 1814 and 1850. During the outbreak of the World War I India’s economy and trade was characterised by boom and slump and revival. During that period India followed ‘free trade’ policy where Indian economy was made colonial and dependent economy based on world capitalism.

The later period (1857- 1947): During those 100 years, there had been a spectacular expansion in trade along with the expansion of railway bore the stamp of growing prosperity of India. In the eighteenth century, India was one of the biggest producers and exporters of cotton fabrics. 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. Gradually India has slipped to a position of one of the largest consumers of foreign manufactures. The decade of 1890s was marked by stagnation in foreign trade due to the interplay of various factors. The nineteenth century showed growth in foreign trade due to the imposition of free trade policy with the objective of expanding market in India. The outbreak of the First World War caused a great setback to India’s foreign trade. 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. On the other hand, during the war, imports declined mainly due to the disruption in the supply side following the World War I. Again India faced decline in trade during 1920s due to Great Depression in 1929. 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.

Key takeaways

2.2 Foreign trade of India during Planning Period

In earlier period, India used to export small scale industrial items to different parts of the world. But during colonial period, India’s export narrowed down to UK with raw materials only. After Independence, some structural changes in foreign trade of India were taken place. The foreign trade of India during planning period are discussed under the following heads-

First plan period: During the first plan period, deficit in BOP of India increased due to import of capital goods and slow growth of export rate.

The second plan period (1956-57 to 60-61):  During the second plan period the import of the country significantly increased and export was slowed down leading to shortage of foreign exchange and unfavourable balance of payment situation. Imports were made for foreign technology, technical knowhow, food grains and concessional capital and. Moreover, huge investments were made in basic and key industries.

The third plan period (1961-62 to 65-66): The third plan period witnessed huge trade deficit due to the higher import for materials, industrial and technical know-how and food grains. The policies unable to promote exports due to low productivity and low quality products.

The fourth plan period (1966-67 to 73-74): India witnessed continuous trade deficit in the last three five year plan period. Hence India devaluated its rupee by 36.5 per cent in 1966. After devaluation the country was able to have a favourable balance of trade position due to favourable agriculture and decline in import of food grains.

The fifth plan period (1974-75 to 78-79): There was also increase in import in this period due to increase in prices of petroleum products, fertilizers and food grains. The export was also increased due to increase in export of fish, fish preparations, coffee, groundnuts, tea, cotton fabrics and ready-made garments. The country witnessed trade surplus in 1976-77 due to surplus export and trade deficit in 1977-78 due to unsystematic liberal import policy along with stagnant export.

The sixth and seventh plan period (1979-80 to 1983-84 to 88-89): This period also experienced trade deficit due to increase in petroleum products although there was considerable increase in export. In 1981-82, the import bill increased to Rs. 13,608 crores and in 7th plan period it was Rs. 28,874 crores. Such trade deficit compelled the Govt. to borrow Rs. 6.7 billions from World Bank and IMF.

Foreign trade from 1989-90 to 93-94: During 1991-93, trade deficit of the country worsened due to import of oil increased by 13.5 per cent. During 1993-94, export promotion measures, export increased by 19.6 per cent and import increased by 6.1 per cent. It resulted in a decline in trade deficit of the country.

Key takeaways

2.3 Recent trends in India’s Foreign Trade

The foreign trade of India expanded since independence. India is a member of WTO and also a part of different bilateral and multilateral foreign trade agreement. The recent trend of India’s foreign trade are-

1. Huge Growth in the Value of Trade: The value of foreign trade increases exponentially since independence due to formulation of new trade policy, favourable trade policy for foreign investment, participation in trade agreement with other countries etc.  From 1950-51 to 1970-71 total value of trade rose by only 60.9 per cent. Again during the period 1970-71 to 1980-81, total value of foreign trade rose significantly by 597 per cent, i.e., by nearly 6 times. But during the period 1980-81 to 1990-91, total value of trade rose by 293.3 per cent, i.e., by nearly 4 times. In 2008-09 the value of trade recorded an increase of 32.79 per cent over the previous year.

2. Higher Growth of Imports:  Sine independence the figures of import also increases due to huge import of industrial inputs, regular import of food grains, liberal imports of non-essential items, periodic hike on oil prices and the initiation of liberal import policy by the government. The value of import increased by 59 per cent from 1950-51 to 1970- 71. In 1989 such value increased by 667 per cent and in 1990-91 showing an increase 244 per cent. In 2008-09, the growth rate of imports was 33.77 per cent over the previous year.

3. Inadequate Growth of Exports:  India is facing slow growth in export since independence due un-favourable terms of trade for Indian primary (agro-based) goods, inadequate export surplus, and adoption of the policy of protectionism by developed countries and long period of business recession in developed country in recent years. From 1950-51 to 1970-71, India witnessed only 62 per cent increase in export growth. Such value showed an increase of 337 per cent in 1980-81 over 1970-71 and in 1990-91, it showed an increase of 385 per cent over the value of 1980-81. In 1993-94, the value of exports witnessed the growth of 29.9 per cent over the previous year. In 2008-2009, the value of exports growth rate was 28.2 per cent over the previous year.

4. Deficit in the Balance of Trade:  India has been experiencing a mounting trade deficit since 1980-81 due to increase in import and slow growth of export. It leads to adverse balance of trade situations for the country.  But after the formulation of policy for import substitution, reduction of unnecessary imports etc. helps to control the trade deficit to certain extent. In 1992- 93 the extent of trade deficit again rose to Rs. 9,687 crore due to huge increase in import. But during 1993-94, the extent of trade deficit declined to Rs. 3,350 crore due to considerable increase in exports. But during 2008-2009, the extent of trade deficit again rose to Rs. 5,33,681 crore. Again during 2009- 2010, the extent of trade deficit further rose to Rs. 2,31,110 crore (April-Sept).

5) Influence of global Dynamism: Foreign trade of India trends to be influenced by global political, cultural, international trade and economic environment. International trade is a complex topic, because the environment it operates in is constantly changing. Since the introduction of LPG policy, the foreign trade of India is experiencing influence of changes in global economy, polity, technology and environment.

6) Cooperation with Countries:

India is co-operating with other countries and international organisations through bilateral and multilateral trade agreements to gain reciprocal advantages, counter trade related problems etc. Such cooperation generally encourages the globalization of business by eliminating restrictions on it and by outlining frameworks that reduce uncertainties about what companies will and will not be

7) Liberalization of Cross-border Movements:  The formulation of LPG policy allows liberalisation of restrictions on cross-border movements of factors of production. It allows India to increase the flow of foreign investment, establishment of MNCs etc.

8) Growth in Emerging Markets:

India is emerging as third largest economy where the investors from different world are investing in different projects. The emerging markets have simultaneously increased the potential size and worth of current major international trade while also facilitating the emergence of a whole new generation of innovative companies.

Key takeaways

2.4 Composition of Export and Import of India

The items of import and export of India are listed below-

Direction of Export and Import of India

Direction of export of India refers to destination of exports. Before British colonial period, India used to export spices and precious stones, including ivory and pearls, textile products etc. in different parts of the world. During the British colonial period, majority share of export was made Britain. But after Independence the scenario has changed and India is making continuous efforts to expand its export by formulating agreements with other countries. Since 1970-71, India’s export is diversified into the markets of Eastern Europe, OPEC, USSR and other developing countries. Now USA has emerged as the most important trading partner followed by Germany, Japan and UK. During the period 2009-10, the share of Asia and ASEAN region comprising South Asia, East Asia, Mid-Eastern and Gulf countries accounted for 55.0 per cent of India’s total exports followed by Europe and America, United Arab Emirates, U.S.A., China, Hong Kong, Singapore, Netherlands, U.K., Germany, Saudi Arabia and Belgium. India’s largest export partner has been Asia. In 2013, India’s largest exports were made to Asia which has grown by more than 2322.2 billion in FY03 to USD 150.4 billion in FY13. The next largest export destination is Europe (USD 58.8 billion in FY13), followed by America (USD 53.4 billion).  In 2019, majority of export is shared by USA followed by UAE, Hong Kong, China etc.

Table 1: Top 25 Destinations of Exports from India

Source: PHD Research Bureau, 2019

Direction of import of India refers to sources of import. Imports sources of India are OECD, OPEC, Eastern Europe, Indonesia, Myanmar, Brazil, Malaysia, United States of America, Japan, Canada, Ukraine, Argentina, Australia, Benin, Guinea Bissau, etc., have gone-up while those from China PRP, Korea RP, Germany, Thailand, Cote D’ Ivoire, Czech Republic. The share of OPEC in India’s total imports gradually increased from 4.6 per cent in 1960-61 to 7.2 per cent in 2003-2004. The share of Eastern European countries in India’s imports which was only 3.4 per cent in 1960-61, gradually rose to 13.5 per cent in 1970-71 but since then its share gradually declined to 1.6 per cent in 2003-2004. The share of developing countries in India’s imports gradually rose from 12 per cent in 1960-61 to 18.4 per cent in 1990-91 and stood at 20.1 per cent in 2003-2004. The share of other countries in India’s imports also gradually increased from 2.0 per cent in 1960-61 to 33.3 per cent in 2003-2004. Another important trend that can be seen is that since 1960-61 India’s trading relations with socialist countries particularly with USSR was expanded. In 2007-08 and 2008-09 the share of Asia and ASEAN in India’s imports remained all along highest followed by West Europe, East Europe, CIS & Baltic States, Asia and ASEAN, Africa and America.

Key takeaways

2.5 Future Prospects of Export of India

India is third largest economy of the world with huge potentiality for investment. Many foreign investors are investing or planning to invest in different projects of the country.  Exports are a vital component of a dynamically growing economy like India. Exports of India have undergone significant changes in the recent years in terms of volume, structure and direction. The Government of India has been undertaking several measures to boost the exports growth trajectory. However, the growth of exports has been at around 9% to 10% during the last few years. Moreover, improved global demand along with recent reforms in policies and procedures at domestic front has created a great opportunity to strengthen the exports growth trajectory. The volume of India’s merchandise exports in 2018-19 is estimated to be around USD 325 billion. In order to take this growth trajectory further to USD 700 billion by 2025, a five pronged strategy has been suggested:-

I. Identification of prospective products to scale up the export volumes

II. Strengthening the export growth momentum towards emerging and developing economies through greater access in the Asian and African economies

III. Structural improvements in export and logistics infrastructure

IV. Developing the supply chains of Micro, Small & Medium Enterprises

V. Enhancing the overall ease of doing exports

Such structural incompetence may be attributed to the inefficient domestic value chain largely due to the low technological adaptability and the absence of technology intensive foreign investment. There is massive scope for Indian exporters in various product categories wherein it could capture the high world demand by strengthening its export-oriented firms in these sectors, including Vehicles, parts and accessories of vehicles, Petroleum oils and Medicines. Additionally, efforts should be made to improve the country’s competitiveness in the other areas as well where exists its inherent strength, including the agro and food processing products, textiles and garments, and the sports goods. Exploring these areas to revitalize exports growth with the improvement in logistics infrastructure and trade facilitation measures would enhance the exports growth trajectory and create approximately 30 million new jobs by 2025, of which enhanced agro and food processing exports would create around 20 million new job opportunities alone. To harness the export potential of the country, the overall ease of doing exports is needed to be enhanced in terms of accessibility to the latest and the most efficient technology and techniques, increased availability to credit for long term loans, easier access to raw materials, building linkages for strong marketing of products, and by improving labour productivity, labour flexibility and capital efficiency. United States of America and China is a strong competitor to India in some products. At the backdrop of global trade recovery, improvement of India’s indicators like Ease of Doing Business and investment rating, India’s trade scenario seems optimistic. Going forward, recent policy changes of Make in India campaign, Start-up India, Skill-India Mission and GST reforms have been evolutionary, and in the right direction. All these together should make exports more attractive and make exporters more competitive in the international markets. In a nutshell, if India continues to move in the direction of the past several years, a new virtuous circle of increased exports and improved economic performance should ensue. A broad strategic policy to pursue comparative advantage in a more thorough going way will have very major advantages for India by promoting exports in the most efficient possible way.

Key takeaways

References