India’s foreign trade

INDIA’S FOREIGN TRADE

Rajalakshmi.K

CONTENTS Overview of India’s Foreign Trade Direction of India’s Trade Composition of India’s Trade Balance of Trade Balance of Payment

INDIA’S FOREIGN TRADE: OVERVIEW The origin of India’s Foreign trade can be traced back to the age

of the Indus Valley civilization. The License Raj and the large number of trade barriers were

intended to be done away with liberalization. Opening up the economy to MNC’s and foreign investors including the core and financial sectors to private & foreign companies transformed India into a land of opportunities.

In early 1990’s the Indian economy had witnessed dramatic policy changes. The idea behind the new economic model popularly known as LPG in India was to make the economy one of the fastest growing economies in the world.

The Industrial Policy of 1991.

DIRECTION OF INDIA’S TRADEThe Direction of Trade is referred to describe the statistical analysis of the set of a

country’s trading partners and their significance in trade. In short, the set of countries where the goods are traded to their significance on a

country’ trade is known as the Direction of Trade.

1. Direction of India’s Trade-Exports:It is the analysis of group of countries to which India exports its goods. There has been

an ever-expanding geographical diversification of India’s exports since independence. The number of countries purchasing India’s exports and the quantity of exports to these countries are continuously increasing.

Group of Countries to which India Exports

2. Direction of India’s Trade-Imports:Group of Countries from which India imports its goods. Formerly, there were many countries with whom we had no or insignificant trade. But, at present we have trade relations with most of the countries in the world.

There has been rapid increase in the imports from almost all the countries with spectacular increase in case of a few countries.

Prior to our independence our import trade was primarily with OECD countries particularly with U.K. The share of OECD countries has declined rapidly after independence and also U.K.

The main reason for these changes in the direction of India’s imports is diversified and increasing demand for imports arising from development requirements.

At present, India’s biggest suppliers are Germany, Belgium, UK, France, Italy, Netherland, Spain.

COMPOSITION OF INDIA’S TRADE The Statistical analysis of a country’s product groups in its international trade is

referred to as Composition of Trade. The analysis carried out for product groups exported is known as the Composition of Exports. As a result of industrial progress during the planning period, there has been an increasing diversification of Indian exports over the years. Before independence and during the initial years of planning, India’s major exports were tea, jute, cotton, textile. As the economy progressed, a large number of finished goods, like capital goods & other engineering items, chemical, leather, ready made garments, handicrafts etc., have entered the export list.

The analysis carried out for product groups imported is known as Composition of Imports. After independence, as a result of the changing requirements of the process of industrialization, there has been a shift in India’s import trade from primary products to capital goods and other intermediate manufacturers. Previously,(1950-1961), India’s major imports consisted of food grains, cotton, jute etc., But after that, the trend has changed, now the import of primary fertilizers, iron & steel, non ferrous metals & other industrial inputs has increased.

INDIA’S SERVICES TRADE India’s service sector has grown remarkably &

contributing a major share to the GDP of a nation. India’s software & IT enabled services has graduated

to newer services. Miscellaneous services segment & education process

outsourcing are significant segment for services exports.

The travel & tourism sector has shown major growth in recent years

FEATURES OF INDIA’S FOREIGN TRADE1. Increasing share of Gross National Income2. Oceanic Trade3. Increase in volume and value of trade4. Change in the composition of Exports5. Change in the composition of Imports6. Mounting deficit in Balance of Trade7. Trend toward Globalization8. Changing role of public sector

BALANCE OF TRADEMeaning: Balance of Trade refers to the difference between the total value of only

goods imported and exported over a given period of time, usually one year. It refers to merchandise account of exports & imports only. It includes only visible items. Visible items are those which are officially recorded at the customs check posts.

Favorable Balance of Trade: If the value of visible exports is greater than the value of visible imports, then the balance of trade is said to be favorable

Unfavorable Balance of Trade: If the value of visible imports exceeds the value of visible exports, the balance of trade is said to be unfavorable

Balanced Balance of Trade: If the value of visible exports is exactly equal to the value of visible imports, the balance of trade is said to be balanced.

BALANCE OF PAYMENTSMeaning: Balance of payment is the systematic records of the economic transactions between the

residents and government of a particular country and the residents & governments of the rest of the world during a certain given period of time, usually a year. Economic transactions include exports & imports of goods & services, capital inflows & outflows, gifts & other transfer payments.

International trade involves three types of transactions.1. The Visible transactions2. Invisible transactions3. Capital transactions

Components of BOP:BOP usually composed of three parts: Current Account Capital Account Official Reserves Account

1. CURRENT ACCOUNT Meaning: Current Account consists of real and short term transactions. It contains receipts and

payments on account of exports of all types of visible and invisible items along with unilateral transfers. Real transactions deal with the actual transfer even of goods and services that affect the national income, output and expenditure of the country. They are generally income generating transfers.

The following items can be found in the current account of the BOP of a nation.1. Visible items2. Travel3. Transportation4. Insurance5. Investment income6. Government transactions7. Gifts grants and donations8. Miscellaneous items

2. CAPITAL ACCOUNTMeaning:Capital account consists of its transactions in financial assets in the form of short-term

lending and borrowings and private and official investments. It refers to the inflow and outflow of capital an account of capital transactions like loans and investments, inflow and outflow of foreign capital, repayment of past debts, interest payment on foreign debts etc. Gold transactions taking place between countries are also included in this account.

The following items constitutes the capital account.1. Private Loans2. Movement in Banking Capital3. Loans4. Amortization5. Miscellaneous items

3. OFFICIAL RESERVES ACCOUNT

It is a part of capital account. It measures the changes in a nation’s liquid and non-liquid liabilities to foreign official holders and the change in a nation’s official reserve assets during the year. It includes its gold stock, changes in the official foreign exchange holdings, SDR holdings of the government and similar other capital transactions etc are some of the other items of credit and payments are the debit items.

Conclusion: The capital account thus, reflects the real monetary position of a country in the international capital market. Neither current account nor the capital account balances. But when the two accounts are taken together, they do balance. Thus, by combining the deficit and surplus on both current and capital account, we get the over all picture of the BOP of a nation.

CAUSES FOR DISEQUILIBRIUM IN BALANCE OF PAYMENTS Cyclical fluctuations Heavy investments on import of capital goods, machines, technical know-how etc

by developing countries Inadequate growth in exports High population growth Demonstration effect Rise in international prices of essential inputs like petroleum, oil and lubricants have

resulted in higher payments leading the disequilibrium Reduction of import duties High Demand

METHODS FOR CORRECTING DISEQUILIBRIUM IN BOP

I. Monetary Methods or Measures:They aim at correcting the disequilibrium in the BOP by regulating & controlling total

monetary resources available in a country. They deal with manipulating various monetary instruments, which affects the total exports & imports of a country.

1. Deflation2. Depreciation3. Devaluation4. Exchange control

II. Trade Measures: They aim at regulating and restricting imports and stimulating the exports of a country.

1. Reduction in imports Import Duties Import Restrictions Import Quotas Import Prohibitions Import Substitution

2. Export Promotion Reduction or abolition of exports duties Granting bounties and subsidies Tax concessions for export industries Entering into bilateral or multilateral trade agreements with other nations

III. Other Measures Borrowings from other capital-rich nations and international financial institutions Encouragement to foreign investment- Private & Public Attracting Non-Resident Indian Deposits Incentives to foreign tourists.

DIFFERENCE BETWEEN BALANCE OF TRADE & BALANCE OF PAYMENTS ON CURRENT ACCOUNT

1. Visible & Invisible items2. Commodities & Services3. Economic position of a country4. Influence in rate of exchange

CONCLUSION1. In 2015-16, the total trade of India has fallen due to fall in both exports & imports

resulting in lowest trade deficit in 5 years2. Such a trend of falling exports was in tandem with growth prospects in other major

world economies.3. Imports have decreased on the account of fall in global oil prices.

Recently, the WTO cut the global trade growth forecast to 2.8% from 3.9% earlier, owing to slowdown in the emerging economies and worsening financial market volatility. Around the same time, the Government of India suggested that it aims to increase India’s share in the global trade to 3.5% from the current level of 2% by 2020, through doubling its goods & services trade. In this regard, India has embarked on further trade liberalization by ratifying the WTO trade facilitation agreement, which could give an impetus to foreign trade. Thus, in the long run, India’s trade will be critically linked for achieving better market access through WTO negotiations as well as integration into regional trade groupings.