Foreign Trade of India: Critical Analysis

FOREIGN TRADE AS AN ENGINE OF INDIA’S GROWTH

MAE Assignment

MARCH 20, 2015

Submitted By:

Group B9

Group Members

Simoni Parmar (14153)

Sindhu S (14154)

Srinidhi K S (14161)

Sristi Roy (14162)

Suman Sadhukhan (14163)

Tony Sebastian (14171)

Submitted To:

Dr.Venkatraja.B

Professor, SDMIMD

Table of Contents

What is Foreign Trade? ................................................................................................................. 1

Salient Features of International Trade .......................................................................................... 2

Foreign Trade of India ................................................................................................................... 4

India’s Foreign Trade 2014-15 (April – September) ......................................................................... 4

Exports .................................................................................................................................... 4

Composition of Exports ......................................................................................................... 7

Imports .................................................................................................................................... 7

Composition of Imports ........................................................................................................ 9

Balance of Trade of India............................................................................................................... 9

Foreign Trade as an Engine of Growth.......................................................................................... 10

1. SME Sector ..................................................................................................................... 10

2. GDP Growth.................................................................................................................... 10

3. Employment ................................................................................................................... 11

Advantages of Foreign Trade ....................................................................................................... 12

Disadvantage of Foreign Trade .................................................................................................... 13

Union Budget 2015-16: Impact on Foreign Trade .......................................................................... 14

Foreign Trade Policy 2009-14 Features......................................................................................... 15

Model for India’s Growth (In terms of foreign trade) .................................................................... 15

Recommendations...................................................................................................................... 16

References ................................................................................................................................. 17

What is Foreign Trade?

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Foreign trade is exchange of capital, goods, and services across international borders or

territories. In most countries, it represents a significant share of gross domestic product (GDP).

While Foreign Trade has been present throughout much of history, its economic, social, and

political importance has been on the rise in recent centuries.

All countries need goods and services to satisfy wants of their people. Production of goods and

services requires resources. Every country has only limited resources. No country can produce

all the goods and services that it requires. It has to buy from other countries what it cannot

produce or can produce less than its requirements. Similarly, it sells to other countries the goods

which it has in surplus quantities. India too, buys from and sells to other countries various types

of goods and services.

Generally no country is self-sufficient. It has to depend upon other countries for importing the

goods which are either non-available with it or are available in insufficient quantit ies.

Similarly, it can export goods, which are in excess quantity with it and are in high demand

outside.

Foreign Trade means trade between the two or more countries. Foreign Trade involves different

currencies of different countries and is regulated by laws, rules and regulations of the concerned

countries. Thus, Foreign Trade is more complex.

Industrialization, advanced transportation, globalization, multinational corporations, and

outsourcing are all having a major impact on the Foreign Trade system. Increasing Foreign

Trade is crucial to the continuance of globalization. Without Foreign Trade, nations would be

limited to the goods and services produced within their own borders.

Foreign Trade is in principle not different from domestic trade as the motivation and the

behaviour of parties involved in a trade do not change fundamentally regardless of whether

trade is across a border or not. The main difference is that Foreign Trade is typically more

costly than domestic trade.

The reason is that a border typically imposes additional costs such as tariffs, time costs due to

border delays and costs associated with country differences such as language, the legal system

or culture. Foreign Trade consists of ‘export trade’ and ‘import trade’. Export involves sale of

goods and services to other countries. Import consists of purchases from other countries.

International or Foreign trade is recognized as the most significant determinants of economic

development of a country, all over the world. The foreign trade of a country consists of inward

(import) and outward (export) movement of goods and services, which results into outflow and

inflow of foreign exchange. Thus it is also called EXIM Trade.

Salient Features of International Trade

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The following are the distinguishing features of international trade:

1. Immobility of Factors

The degree of immobility of factors like labour and capital is generally greater between

countries than within a country. Immigration laws, citizenship, qualifications, etc. often restrict

the international mobility of labour. International capital flows are prohibited or severely

limited by different governments. Consequently, the economic significance of such mobility

of factors tends to equality within but not between countries.

2. Heterogeneous Markets

In the international economy, world markets lack homogeneity on account of differences in

climate, language, preferences, habit, customs, weights and measures, etc. The behaviour of

international buyers in each case would, therefore, be different.

3. Different National Groups

International trade takes place between differently cohered groups. The socio-economic

environment differs greatly among different nations.

4. Different Political Units

International trade is a phenomenon which occurs amongst different political units.

5. Different National Policies and Government Intervention

Economic and political policies differ from one country to another. Policies pertaining to trade,

commerce, export and import, taxation, etc., also differ widely among countries though they

are more or less uniform within the country. Tariff policy, import quota system, subsidies and

other controls adopted by governments interfere with the course of normal trade between one

country and another.

6. Different Currencies

Another notable feature of international trade is that it involves the use of different types of

currencies. So, each country has its own policy in regard to exchange rates and foreign

exchange.

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Foreign Trade of India

Foreign trade in India includes all imports and exports to and from India. At the level of Central

Government it is administered by the Ministry of Commerce and Industry. There are records

throughout history of India's trade with foreign countries. Prior to the 1991 economic

liberalisation, India was a closed economy due to the average tariffs exceeding 200 percent and

the extensive quantitative restrictions on imports. Foreign investment was strictly restricted to

only allow Indian ownership of businesses. Since the liberalisation, India's economy has

improved mainly due to increased foreign trade.

For providing, regulating and creating necessary environment for its orderly growth, several

Acts have been put in place. The foreign trade of India is governed by the Foreign Trade

(Development & Regulation) Act, 1992 and the rules and orders issued there under. Payments

for import and export transactions are governed by Foreign Exchange Management Act, 1999.

Customs Act, 1962 governs the physical movement of goods and services through various

modes of transportation.

To make India a quality producer and exporter of goods and services, apart from projecting

such image, an important Act – Exports (Quality control & inspection) Act, 1963 has been in

vogue. Developmental pace of foreign trade is dependent on the Export-Import Policy adopted

by the country too. Even the EXIM Policy 2002-2007 lays its stress to simplify procedures,

sharply, to further reduce transaction costs.

India’s Foreign Trade 2014-15 (April – September)

India’s trade performance improved significantly in Q1 of 2014-15, building on the growth in

exports and compression in imports in 2013-14. However, in Q2 of 2014-15 export growth lost

momentum with the weakening of activity in major trade partner economies and also due to

persistence of supply-side constraints in certain export industries/sectors domestica lly.

Alongside, there was a pick-up in import growth, particularly non-oil non-gold imports, with

anecdotal evidence suggesting that imports are substituting for production shortfall in certain

sectors within the economy.

Exports

A sharp rise in exports in May-July 2014 more than outweighed the deceleration characteris ing

subsequent months. Notwithstanding export growth roughly halving in Q2, the overall increase

in exports in April September 2014 was 6.5 per cent, up from 6.3 percent in April-September

2013. Even though the overall export growth was a shade better in April-September 2014 than

the corresponding period of 2013-14, it was concentrated in a few major sectors. Growth

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impulses mainly emanated from four sectors, viz., engineering goods, petroleum products,

readymade garments and basic chemicals and pharmaceuticals which accounted for 58 per cent

of the total value of exports. Other sectors, viz., gems and jewellery, electronic goods, oil meals

and iron ore.

Destination-wise analysis shows that exports to the US, the UAE, China and South Korea

gained momentum during April-September 2014 on a y-o-y basis. However, exports to Saudi

Arabia, Hong Kong, Singapore and countries in the European Union (except Germany) either

decelerated or turned negative (Chart 4). Weaker demand conditions in most of these trade

partner countries seem to have weighed on India’s exports.

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In terms of share in total exports, the US continues to be the largest market for Indian goods

with a share of 13.8 per cent, followed by the UAE (10.5 per cent), Saudi Arabia (4.4 per cent),

Hong Kong (4.2 per cent) and China (3.7 per cent). Notwithstanding a decline in exports of

gems and jewellery, rise in exports to US was mostly driven by a rise in exports of drugs,

marine products and products of iron and steel. As growth in exports to most European

countries either decelerated or turned negative, the EU lost its share in India’s exports albeit

marginally.

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Composition of Exports

Imports After recording a decline for twelve successive months, India’s imports have begun to pick up

since June 2014. As a result, India’s imports grew by 1.6 per cent during April-September 2014

as against a contraction of 2.5 per cent in the corresponding period last year. Commodity-wise

analysis shows that Petroleum, Oil and Lubricants (POL) imports, accounting for nearly 35 per

cent of total imports, increased modestly during April-September 2014. Although the

international crude oil prices (Indian basket) were higher during April-July 2014 (y-on-y basis),

the subsequent softening in prices helped stem POL import growth. In quantum terms, there

has been a marginal growth in POL imports. Although gold imports surged in the second

quarter, overall gold imports in the first half of 2014-15 continued to be lower than in the

corresponding period last year. In quantum terms, gold imports stood at 365 tonnes during

April-September 2014, about 20 per cent lower than the level during April-September 2013.

Even though the increase in non-oil non-gold imports appears to be indicative of gradual

recovery in the domestic economy, supply-side bottlenecks in certain sectors may also have

induced substitution through imports. In particular, import demand for basic and intermed ia te

goods including iron and steel, nonferrous metals, metal ferrous ores and other minera ls,

artificial resins, plastic materials and electronic components has picked up in April-September

2014.

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The direction of trade shows that there were lower imports from the EU, the US, Switzerland,

Iraq, Kuwait, Saudi Arabia and the UAE. The sharp decline in imports from oil exporting

countries was largely due to fall in international oil prices in August and September 2014. The

decline in imports from Switzerland by 17.1 per cent was mainly due to contraction in gold

imports.

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Composition of Imports

Balance of Trade of India

Year Exports Imports Trade Balance

2013-14 19050.11 27154.34 -8104.23

2012-13 16343.19 26691.62 -10348.43

2011-12 14659.59 23454.63 -8795.04

2010-11 11429.22 16834.67 -5405.45

2009-10 8455.34 13637.36 -5182.02

2008-09 8407.55 13744.36 -5336.8

2007-08 6558.64 10123.12 -3564.48

2006-07 5717.79 8405.06 -2687.27

2005-06 4564.18 6604.09 -2039.91

2004-05 3753.4 5010.65 -1257.25

2003-04 2933.67 3591.08 -657.41

2002-03 2551.37 2972.06 -420.69

2001-02 2090.18 2452 -361.82

All values in Rupees Billion.

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Foreign Trade as an Engine of Growth

1. SME Sector India has nearly three million SMEs, which account for almost 50 percent of industrial output

and 42 percent of India’s total exports. However, as a result of globalization and liberalizat ion,

coupled with WTO regime, SMEs have been passing through a transitional period. With

enhanced competition from China and a few low cost centres of production from abroad many

units have of late been facing a tough time. However, those SMEs who had a strong

technological base, international business outlook, competitive spirit and willingness to

restructure themselves withstood the current challenges and came out successful to make their

own contribution to the Indian economy. Foreign trade will help the SME sector greatly.

Because of Foreign trade they can find new customers around the world. Through foreign trade

the sector will be more exposed to new technologies and innovations which can be

implemented here. Foreign trade also increases competition. With rise in competition the

companies will innovate more to remain competitive thus forms superior products and services.

2. GDP Growth Merchandise trade as a share of GDP is the sum of merchandise exports and imports divided

by the value of GDP, all in current U.S. dollars. The below given is in percentages.

1995-1999 2000-2004 2005-2009 2010-2014

India 33.7 40.8 42.3 41.5

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

30000

Exports Imports Trade Balance

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From 1995 to 2014 the percentage contribution is showing an increasing trend. Close to half

of the GDP is contributed by foreign trade, if we consider the time period of 2010 – 2014. This

shows the importance of foreign trade for our country.

3. Employment As foreign trade increases the number of jobs also increases automatically. Foreign trade

influences employment directly as well as indirectly. When exports increases the production

also increases. As production increases more people are employed to do the work. But import

adversely affects the employment within the country. Because as more and more goods are

imported the production within the country decreases. So the number of employment also

decreases.

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Advantages of Foreign Trade

A Competitive Edge

Trading your products internationally can give you an advantage over competition. If the

domestic market is already flooded with similar products, then overseas markets may just be

the answer to better profitability. This holds especially true for products that aren’t widely

available overseas. As the international market for your good gets bigger, sales increase, giving

you an advantage over others in your industry.

Economies of Scale in Production

Companies engaging in international trade experience improved efficiency brought on by the

presence of economies of scale in production. This can bring about significant trade gains due

to the reallocation of resources that can raise productive efficiency. Simply put, more output

can be created at lower costs bringing about major savings.

New Markets

International trade can give you the opportunity to understand the varied market trends that can

affect your business. It is common business saying that 95% of a company’s prospective market

is situated out of the country. And it just won’t be wise to forego such a huge potential for

business, leads, profits and thus business growth.

So, the function of international trade is to capitalize on profitable opportunities for owners,

which is the single most significant directive for corporations and many other businesses.

Insulation from Seasonal Domestic Sales

For business concerns that offer season specific services or products, expanding operations to

overseas is a perfectly viable way of staying busy and making money all year around. And

staying in business all year round is a great way of outmanoeuvring competitors. Internationa l

trade can introduce a company to whole new foreign markets.

Improved Return on Investments

Spreading your risk in foreign markets and companies means that your organization won’t only

be subjected to the tribulations of the U.S economy. This diversification can shield their

businesses from the investment risk of putting all their eggs in one basket. Simila r ly,

international traders are also ideally poised to take advantage of the higher than usual potential

for growth of some foreign economies. It is important to do your research right to find the right

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emerging markets for your kind of business. Of course, it is also important to balance these

advantages against the likelihood for high costs and abrupt changes that are the special risks of

investing internationally.

Gains of Specialisation

Each trading country gains when the total output increases as a result of division of labour and

specialisation. These gains are in the form of more aggregate production, larger number of

varieties and greater diversity of qualities of goods that become available for consumption in

each country as a result of international trade.

Disadvantage of Foreign Trade

Economic dependence:

Too much dependence on imports may undermine the economy of a country. Developed

countries may economically exploit the underdeveloped countries which have to depend for

their economic development on the former. There may be colonisation of weak nations.

Restricted growth of home industries:

Foreign trade may discourage the growth of domestic industries. Unrestricted imports and

foreign competition might pose a threat to the survival of infant and upcoming industries in the

country. Dumping policy of developed nations may cause harm to underdeveloped nations.

Misuse of natural resources:

Excessive exports may cause quick depletion of natural resources of a country. Foreign trade

may promote lopsided development if only those goods which have comparative cost

advantage are produced in a country.

Political exploitation:

Foreign trade may create economic dependence which may threaten political independence.

For example, the Britishers came to India as traders and ultimately ruled the country for

centuries.

Import of harmful goods:

Import of luxury goods, spurious drugs, etc., may cause harm to the well-being of people.

Exports of essential commodities may result in shortage of these goods at home and people

suffer due to inflation.

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Rivalry among nations:

Intense competition for exports may lead to rivalry among nations. It may hamper internationa l

cooperation. Foreign trade creates rivalry amongst nations due to competition in foreign

markets. Unhealthy competition may lead to conflict of interest and eventually to wars between

nations.

Invasion of culture:

Foreign trade may lead to invasion of a country's culture. Young citizens of poor nations get

accustomed to foreign consumption pattern and lifestyles.

Dumping:

Dumping tactics resorted to by advanced countries may harm the development of poor

countries.

Union Budget 2015-16: Impact on Foreign Trade

Corporatization of state-run ports

The corporatisation of ports and subsequent converting of them into companies will pave the

way for more efficient ports adhering to international norms in services.

Tariff rate on iron & steel and articles of iron or steel has been increased from

10% to 15%

The steel industry in India is passing through difficult phase with falling prices, decline in

demand and surge in imports. With a view to provide a little protection to domestic industry,

Government has increased the tariff from 10% to 15% which will also augment to Government

revenue.

The Union Budget has talked about facilitating of manufacturing hubs in CMLV

(Cambodia, Myanmar, Laos, and Vietnam) countries which will help India to enter into

Regional Value Chain besides strengthening our relation with them. This will also

support exports from India as part manufacturing will be done in India and part in

CMLV countries for exports to such countries with whom CMLV have Free Trade

Agreements while India does not have particularly countries like China.

Movement of exports goods from factory to ports/airport/land customs station through

road has been exempted from Service Tax.

A definite road map for GST will help the export sector to get some relief on state taxes

which are at the moment rebated only in respect of VAT. The extension in availment

of CENVAT facility from 6 months to 12 months, a demand of export sector, will help

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the exporters. However, the non-withdrawal of DDT and MAT has been a dampener

for SEZ units.

Foreign Trade Policy 2009-14 Features

$ 200 billion or Rs 98,000 crore is the export target for 2010-11.

100% growth of India’s export of goods and services by 2014.

15% growth target for next two years; 25% thereafter.

3.28% targeted India’s share of global trade by 2020 double from the current 1.64%.

Jaipur, Srinagar Anantnag, Kanpur, Dewas and Ambur identified as towns of export

excellence.

26 new markets added to focus market scheme.

Provision for state-run banks to provide dollar credits.

Duty entitlement passbook scheme extended till Dec. 2010.

Tax sops for export-oriented and software export units extended till March 2011.

New directorate of trade remedy measures to be set up.

Plan for diamond bourses.

New facility to allow import of cut and polished diamonds for grading and certificat ion.

Export units allowed to sell 90% of goods in domestic market.

Export oriented instant tea companies can sell up to 50% produce in domestic market.

Single-window scheme for farm exports.

Number of duty-free samples for exporters raised to 50 pieces.

Value limits of personal carriage increased to $5 million (Rs 24.5 core) for participat ion

in overseas exhibitions.

Model for India’s Growth (In terms of foreign trade)

Over the years, India's foreign trade has come to occupy a pivotal position in the economic

scenario and prosperity of the country. India exports a huge number of products and imports

equally a good number of required products. India must evolve an appropriate framework to

wrest maximum benefits out of international trade and investment.

This framework should include:

Making explicit the list of demands that India would like to make on the multilatera l

trade system,

Steps that India should take to realize the full potential from international trade.

Establishing symmetry as between the movement of capital and natural persons.

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Delinking environmental standards and labour related considerations from trade

negotiations.

Zero tariffs in industrialized countries on labour intensive exports of developing

countries.

Effective restraint on industrialized countries in initiating anti-dumping and

countervailing action against exports from developing countries.

Adequate protection to genetic or biological material and traditional knowledge of

developing countries.

Recommendations

1. India has nearly three million SMEs, which account for almost 50 percent of industria l

output and 42 percent of India’s total exports. So it is very important to develop this

sector. The government should organise international conferences where industria l ist

from different parts of the world will take part. This will help them to understand what

is happening around the word and about the emerging markets. The government should

also give them financial assistance to participate in different trade fares and

conferences.

2. Dependency on only few economies like America or European Union should be

reduced. The imports should be diversified among different countries. This will help

during difficult times. Economic slowdown in one economy can be compensated by

depending on other countries.

3. Changes should be made to encourage FDI. If more and more export oriented

companies setup their manufacturing units in India, it will help to increase export to a

large extend.

4. Industries of the country are still lagging behind the international standard. A country

can achieve sustainable growth only through the growth of their industries. Industria l

goods should form the major part of the country’s export.

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References

http://www.quickmba.com/strategy/global/diamond/

http://commerce.nic.in/publications/anualreport_chapter2-2011-12.asp

http://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=15068

http://pib.nic.in/newsite/PrintRelease.aspx?relid=117041

http://en.wikipedia.org/wiki/Economy_of_India

http://commerce.nic.in/annual2006-07/html/chapter2.html

http://business.gov.in/trade/foreign_trade.php

http://www.moneycontrol.com/sme-

stepup/news/decoding_the_budget_2015_for_smes__exporters-1319170.html

https://www.academia.edu/5450799/GLOBALIZATION_AND_IN DIAS_FOREIGN

_TRADE_INTRODUCTION