AN EXPLORATORY STUDY OF INDIAN FOREIGN TRADE

Rajesh K PILLANIA
Management Development Institute, India
[email protected]
Abstract
Indian economy and foreign trade are on a growth trajectory. Indian exports have come a
long way in
value terms from the time of gaining independence in 1947. The total value of India’s
merchandise exports
increased from US $ 1.3 billion in 1950-51 to US $ 63.8 billion in 2003-04 – a compound
rate of 7.6 per cent.
Trade growth has picked up post liberalization of 1991. The composition of trade is now
dominated by
manufactured goods and services. India services exports share in global exports is more
than double of that of
Indian manufacturing exports. East Asian countries, particularly China have become a
major trading block.
There is huge untapped potential for Indian foreign trade in years to come.
Keywords: India, Foreign Trade, Liberalization, Trade Composition, Trade Direction.
JEL Classification: F14, F41, F43
1. Introduction
Indian exports have come a long way from the time of independence in terms of
value. The total
value of India’s merchandise exports increased from US $ 1.3 billion in 1950-51
to US $ 63.8 billion
in 2003-04 – a compound rate of 7.6 per cent [Malik, (2005)].Indian economy and
foreign trade has
shown progress post liberalization. In contrast to the pre-reform period (1950-
90), the actual growth of
exports in the post-reform period has been above the potential offered by the
growth of world demand.
The gap between the actual and potential is mainly explained by an
improvement in the overall
competitiveness of India’s exports [Virmani, (2003), Veeramani, (2007)].
Over the last few years, the growth rates has picked up. The current account has
followed an
inverted “U” shaped pattern during the period from 2001-02 to 2006-07, rising to
a surplus of over 2
per cent of GDP in 2003-04. Thereafter it has returned close to its post-1990s
reform average, with a
current account deficit of 1.2 per cent in 2005-06 and 1.1 per cent of GDP in
2006-07. Capital inflows,
as a proportion of GDP, have been on a clear uptrend during the six years (2001-
02 to 2006-07) of this
decade. They reached a high of 5.1 per cent of GDP in 2006-07 after a somewhat
modest growth rate
of 3.1 per cent in 2005-06. The net result of these two trends has been a gradual
rise in reserve
increase to reach 4 per cent of GDP in 2006-07.
With capital inflows exceeding financing requirements, foreign exchange reserve
increase was
of the order of US$ 15.1 billion in 2005-06 and US$ 36.6 billion in 2006-07.As a
proportion of GDP,
external debt was 17.2 per cent and 17.9 per cent in 2005-06 and 2006-07
respectively [Ministry of
Finance, (2008)]. This research paper studies Indian foreign trade since 1949. It
consists of three
sections including this introduction part. The second section studies various
aspects of Indian foreign
trade and the last section is conclusion part.
2. Indian Foreign Trade over the Years 1949-2006
Indian foreign trade has grown in absolute numbers as compared to 1950-51, but
its share in
world trade has gown down from around 2.5 percent to 0.67 percent in 1991 and
increased to more
than one percent in 2007. For the purpose of study, foreign trade can be divided
into three periods
namely 1950-1970, 1971-1991 and post 1991.
During the first phase, 1950-1970, exports have grown at a very slow rate.
During 1950s the
exports growth rate was 3.6 percent in dollar terms and 3.5 percent in 1960s as
shown in Table 1.Due
to rising imports and stagnant exports, policy of import substitution was started
in 1960s to cut down
on imports. Five primary commodities constituted a major portion of Indian
exports and the prevailing
belief was that the country had nothing much to export. Government had
adopted a policy of export
pessimism and import substitution during this period. Exports were largely
neglected during the first
and the second five-year plans, which was justified on the ground that demand
for Indian exports was
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282
inelastic. Whilst the world merchandise export was growing at 6.3 per cent per
annum during the
1950s, exports from India stagnated. As the world merchandise exports
expanded relatively faster
during the 1960s at 8.8 per cent per annum, the growth rate of India’s exports
improved somewhat to
3.6 per cent per annum. Clearly, the country failed to make the best use of the
trade possibilities
available during the 1950s and 1960s [Singh, (1964); Bhagwati and Srinivasan,
(1975); Nayyar,
(1976); Veeramani, (2007)]. Several studies have argued that the import
substitution policies had
created a bias against exports in India. In spite of the various export promotion
schemes adopted in the
1970s and 1980s, profitability in the heavily protected domestic market
remained significantly higher
than that in the export market [Kathuria (1996), Veeramani, (2007)].
Table1. Performance of Trade Sector (Export and Import) in India
Performance of Trade Sector (Export and Import) in India
(1950-1951 to 1999-2000)
Growth Rate
In Rupee Terms
In US Dollar
terms
In Real terms
(Volume)#
Annual As per cent to GDP
Average
Exports Imports Exports Imports Exports Imports Exports Imports
(Exports+
Imports)@
1950-51 to
1959-60
3.6 6.1 3.6 6.1 3.0 4.1 5.1 6.7 11.8
1960-61 to
1969-70
8.9 6.3 3.5 0.8 2.7 1.4 3.4 5.5 8.9
1970-71 to
1979-80
16.8 20.7 15.8 20.1 7.3 6.7 4.5 5.3 9.8
1980-81 to
1989-90
16.4 14.9 8.0 7.2 4.2 7.3 4.6 7.2 11.8
1990-91 to
1999-2000
19.5 20.1 8.6 9.6 11.0 12.2 7.8 9.3 17.1
1992-93 to
1995-96
24.7 26.8 15.7 17.5 17.5 21.3 8.1 9.0 17.1
Note #: Refers to calendar year. Volume obtained by dividing value of exports (f.o.b) and
imports (c.i.f)
with their respective unit prices. @: Figures may not add-up due to rounding off.
Source: Report on Currency and Finance (2002-03), Reserve Bank of India; IndiaStat
Database (2008).
During the period of 1970-1991 exports performance improved. Government had
taken
initiatives in late 1960s like establishing Indian Institute of Foreign Trade and
others for promoting
foreign trade. The world economy was also growing fast in 1970s. The export
growth rate was 15.8
percent in 1970s before slowing down to 8 percent in 1980s.During 1970s,
imports growth rate also
picked up and infact was higher than growth rate of exports. The contribution of
foreign trade to GDP
again reached to 11.8 per cent, the same level as on 1950-51. The export boom
of the 1970s, however,
could not be maintained during the first half of the 1980s. As the growth rate of
world exports turned
negative in the aftermath of the second oil price hike, India’s exports decelerated
sharply. During the
second half of the 1980s, however, the world economy recovered and India’s
exports grew at a healthy
pace (17.8 per cent). There was a genuine improvement in the export
competitiveness of India during
this period due to a major depreciation of the REER and increased export
subsidies. This period also
witnessed some doses of industrial deregulation and liberalization of capital
goods imports [Joshi and
Little (1994); Veeramani, (2007)].
In the post liberalization period i.e. post 1991, export and import growth has
picked up and the
contribution of foreign trade to GDP has increased to 17.1 percent by
2000.However during the period
import growth rates has been higher than exports growth rates. Many pro export
policies were started
after liberalization. Export promotion schemes prevalent during the post 1991
period include: export
promotion capital goods (EPCG), duty entitlement passbook (DEPB), duty free
replenishment
certificate (DFRC), advance licences, special import licence (SIL), exemption from
income tax,
sector/market-specific schemes [e g, market access initiative (MAI), towns of
export excellence, agri
export zones (AEZ), Focus Africa, and Focus Latin American Countries], and
schemes for statusJournal
of Applied Economic Sciences
283
holders, export oriented units (EOUs), units in special economic zones (SEZs),
electronic hardware
technology parks (EHTPs), software technology parks (STPs) and biotechnology
parks (BTPs). A few
more schemes (such as, target plus, served from India) have been added under
the Foreign Trade
Policy 2004 [RBI (2004), Malik, (2005)].
Indian Investment Centre; IndiaStat Database(2008).
The trade balance has always been negative as shown in Table 2 and Table 3
except two years
1972-73, 1976-77.The trade deficit has been increasing in recent years.
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284

During post liberalization era, exports have done well particularly from 1992-93
to 1996-97;
and from 2002-2003 to 2007-2008. As a proportion of GDP, on balance of
payments (BoP) basis,
exports rose from a level of 5.8 per cent in 1990- 91 to reach a level of 14.0 per
cent of GDP in 2006-
07. The average annual growth rate in the last five years has been placed at a
high of 23.5 per cent.
However, imports have grown even faster in the last five years at an annual
average of 28.2 per cent.
As a proportion of GDP, on BoP basis, imports in 2006-07 were placed at 20.9 per
cent of GDP. Thus,
trade deficit widened to 6.9 per cent of GDP in 2006-07. The higher trade deficit
could be attributed to
a rise in petroleum, oil and lubricants (POL) as well as non-POL components in
imports. Continued
uptrend in prices in the international markets and rise in the price of gold were
the major contributors
to this process [Finance Ministry, (2008)]. The trade account is supported by the
rising services
exports. India’s services exports, at $81.3 billion (Rs3.2 trillion) in 2006-07, are
fast catching up with
the country’s merchandise exports of $127.1 billion. The services export growth
rate in 2006-07 was
32.5% compared to 21% in merchandise export [Singh,(2007)]. IBEF has
estimated that if the average
annual growth rates of the last three years – 56.3 per cent for service exports
and 21.8 per cent for
manufacturing exports – were projected into the future, by the beginning of
2007, services could
topple merchandise goods at the pole position in exports [IBEF, (2005)]. Indian
share of global
services export is more than double of merchandise exports and India is one of
the few countries
which have increased their share of services exports in recent years.
Private transfers receipts (mainly remittances) shot up, year-on-year, by 49.2 per
cent as against
19.2 per cent in the corresponding period of the previous year. Investment
income (net) grew by 60.0
per cent in 2007-08 (April-September) reflecting the burgeoning foreign
exchange reserves. Net
invisible surplus grew by 35.2 per cent to reach US$ 31.7 billion in 2007-08
(April-September),
equivalent of 6.1 per cent of GDP. Thus, higher invisible surplus was able to
moderate somewhat the
rising deficits on trade account and current account deficit was placed at US$
10.7 billion in 2007-08
(April-September), equivalent of 2.0 per cent of GDP [Finance Ministry, (2008)].
Table 4 shows the Terms of Trade for Indian economy from 1969-1970 to 2005-
2006.The terms
of trade has been fluctuating over the years.
Journal of Applied Economic Sciences
285
Note: 1. Gross Terms of Trade implies Volume Index of Imports expressed as a
percentage of Volume
Index of Exports.
2. Net Terms of Trade implies unit value Index of Exports expressed as a percentage of
unit value
index of Imports.
3. Income Terms of Trade implies the product of Net Terms of Trade and Volume Index of
Exports
as a percentage.
* : Converted from the original base with the help of linking factors.
Source: Ministry of Commerce & Industry, Govt. of India. & Department of Economics
and Statistics
Govt. of Tamil Nadu, IndiaStat Database (2008).
Estimated Foreign Trade by 2020
Trend analysis was used to project the export and import growth and trade
deficit/ surplus up to
2020. For this, time series data, ranging from 1950-2007 on export, import and
trade deficit/surplus
was used. The analysis shows that export trade will grow up to US$ 61 billion. On
the other hand
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286
import will continue to grow and cross US $ 79 billion. The trade deficit will keep
increasing and
reach USD 18 billion by 2020. Table 5 shows estimated trade till 2020.
Year
Estimated
Export Y1^
Estimated
Import Y2^
Deficit
Composition of Indian Foreign Trade
Indian foreign trade has undergone a change in its composition over the years. In
1948-49, tea,
jute manufacturers, cotton manufactures, oilseeds, hides and skins, and metals
and ores constituted 71
per cent of total Indian exports. This dependence on a few commodities not only
introduced an
element of instability in export prospects but was bound to weaken the country's
position in regard to
larger questions of policy [Planning Commission, (1950)]. Import consisted of
manufactured goods
and food grains. On the eve of independence in 1947 ,exports consisted chiefly
of raw materials and
plantation crops while imports composed of light consumer goods and other
manufactures [Mathur,
(2006)]. The composition of trade has changed considerably. Today the
manufactured goods and
services dominate the export basket.
The composition of exports shows a perceptible shift in this decade i.e. 2000s
from light
manufactures to heavy manufactures and petroleum crude and products as
shown in Table 6. The share
of textiles and ready-made garments (RMG) has fallen dramatically by 11.1
percentage points in
2006-07 over 2000-01 followed by gems and jewellery, leather and leather
manufactures and
handicrafts. Share of engineering goods and petro products has increased by 7.6
percentage points and
10.7 percentage points, respectively. The share of primary products has declined
somewhat with the
decline in share of exports from agricultural and allied sector being partly offset
by a rise in the share
of ores and minerals by 2.8 percentage points. The share of chemicals, including
petrochemicals, has
increased marginally. The share of petroleum crude and products has risen
further to 18 per cent in the
first half of 2007-08 from 15 per cent in 2006-07. Engineering goods’ share also
maintained a rising
trend in 2007-08. Export growth in 2006-07 was driven mainly by petroleum
products with 59.3 per
cent growth and engineering goods with 38.1 per cent growth. The perceptible
increase in the share of
petroleum products in total exports reflected not only the rise in POL prices but
also India’s enhanced
refining capacity. The rising share of engineering goods reflected India’s revival
of heavy
manufactures. Induced by strong international minerals, after growing at a
compound annual growth
rate (CAGR) of 50 per cent in the first half of this decade, moderated to 12.6 per
cent in 2006-07
[Finance Ministry, (2008)].