FOREIGN TRADE

Foreign Trade is the exchange of capital, goods and services across international
borders or territories. According to Robertson, “Foreign Trade is an engine of
economic growth.” It plays a vital role to the growth and development of an
economy in terms of enhanced level of production, generation of employment
and income and inflow of foreign exchange at the domestic level and
strengthening bilateral and multilateral economic relations at the global level.
INDIA’S FOREIGN TRADE AT THE TIME OF INDEPENDENCE
Before 1947, India was a colony of the British and the pattern of her foreign
trade was typically colonial. India was the supplier of foodstuffs and raw
materials to the industrialized nations and an importer of manufactured goods.
This excessive dependence on foreign manufacturers caused a severe blow to
the indigenous handicraft industries in India.
India’s foreign trade presented a dismal picture of a backward economy
exporting raw materials and importing finished goods. Thus, with the dawn if
independence, the colonial pattern of trade had to be changed to suit the needs
of a developing economy. India had to embark on a programme of development
which is required to extend its productive capacity at a fast rate.
Over the last 71 years, India’s foreign trade has undergone a complete change
both in regard to the composition as well as the direction of trade. India’s
exports before independence, comprised primarily of three commodities,
namely tea, jute and cotton textiles. At the time India became independent these
constituted about half of the total exports from the country. Some of the other
items exported were primarily products like manganese ore, mica, shellac,
rawhides and skins. Only about .4% of the exports consisted of engineering
goods. So far as direction of trade was concerned U.K. and U.S.A. accounted
for about 40% of the exports. The share of other countries was rather small.
Trade with East European countries was negligible. After independence Indian
foreign trade had changed drastically in all its dimensions- Value, Composition
and Direction .Till 1990-91 i.e. during pre-reform period, despite changes the
Indian share in world trade had remained quite inadequate. However during
reform period particularly after 1990’s, much progress was witnessed by Indian
Foreign trade.

TRENDS IN INDIA’S FOREIGN TRADE

The trends in Indian foreign trade can be observed from the discussion of the
trends in value of foreign trade, composition and direction.
I. CHANGES IN VALUE OF TRADE SINCE INDEPENDENCE
Growing value of exports: The total value of India’s international trade has
gone up from US $ 1269 million in 1950-51 to nearly US $8486 million in
1980-81, US $ 303,526 million in 2017-18, US $ 330,078 million in 2018-
19, US $ 313,361 million in 2019-20 and to US $ 291,164 million in June
2020-21.
Much of this increase was concentrated in last 20 years. One reason why
India’s export were almost stagnant during the first 15 years of planning was
the predominance of traditional goods such as tea, jute and cotton
manufactures, the foreign demand for which was generally inelastic.
Besides, the rise in prices in India and the high cost of our export goods did
not allow these goods to be competitive in the international markets. After
devaluation of rupee in 1966, Indian export goods got a price advantage.
Moreover, the government entered into a series of bilateral agreements with
fiscal and cash incentives to boost exports. Finally, it set up a number of
export promotion councils and agencies to promote export.
Larger growth of India’s imports: India’s imports showed a continually
increasing trend. In 1950-51, Imports were US $ million 1273, in 1980-81 it
was increased to US$ 15869 million , and in recent year 2017-18 it increased
to US$ 465,581 million, US $ 517,078 million in 2018-19, US $ 474,709
million in 2019-20 and finally to US $ 393,611 million in June 2020-21.
The rise in imports on the eve of planning was largely due to the pent up
demand of the war and the post-war period. There was shortage of food and
basic materials as a result of partition (India and Pakistan). In order to meet
the growing demand for hydro-electric projects started during the period,
there was rise in imports of machinery and equipment (Capital goods).
The OPEC increased the prices of petroleum products and as a result the
import bill shot up in the Sixth Plan period (1980 – 1985). The hike in
petroleum prices led to the decline of POL imports. This decline was
counterbalanced by a big hike in non-POL imports as a consequence of
import liberalisation. There was the need for domestic production of oil and
natural gas which further escalated the imports of capital goods to meet the
demand for heavy investments.

Widening Trade Deficit: Table 1 shows that in 1950-51 Trade deficit was
US$ 4 million in 1980-81 it was increased to US$ million 7383. In 1990-91
it was decreased to US $ 5932 million, it was further decreased to US$ 1546
million. In 2017-18 it was US $ 162,054 million. During 2018-19 Trade
Deficit was US $ 184,000 million, US $ 161,348 in 2019-20 and US $
102,447 million in June 2020-21 records.
India’s widening trade deficit has been witnessed from the eve of planning
until now. The main reasons for the trade balance of India recording a deficit
from one plan period to another is mainly due to hike in international oil
prices, rising imports of capital goods for investment projects, shortage of
food and crops due to natural calamities, political crisis of India’s leading
trading partners and unprecedented economic slowdown encountered in the
global economy.
Moreover, India lacked industrial base and export competitiveness in
international trade and when this feature was combined with import
liberalisation undertaken by the respective presiding government, imports
escalated to a degree of serious concern. Exports from India was not able to
pace up and match the imports accordingly. Trade deficit was common
feature of India’s foreign trade during the Five Year Plan periods.
The following tables show the Volume of Foreign Trade during 2018 to June
2021
II. CHANGES IN COMPOSITION OF FOREIGN TRADE
Composition of Trade means the commodities and products which are
included in the exports from India to other countries and Imports from other
countries in India. Indian foreign trade registered a number of structural
changes during the planning period. The percentage of non-traditional goods
in total exports has continuously increased the exports of chemical and
engineering goods have shown a high growth rate. During past few years
hand made goods including gems and jewellery have become one of the
important export commodities. India is making exports of few traditional
items including tea, coffee, rice, pulses, spices, tobacco, jute, iron ore etc.
Besides the imports of petroleum products, capital goods, carbon chemical
and compounds, medical and pharmaceuticals products are also imported in
Indian Economy.
The following Table show the composition of major exports from India
On the basis of Table 2 following observations can be made
1. Agriculture and Allied Products- which includes coffee, tea, rice,
wheat, raw cotton, tobacco, cashew, spices, oil meal, marine products, sugar
and molasses. In 2012-13 Agriculture and allied products export was US $
28302.5 million which increased to US $ 32879.4 million in 2017-18.
2. Ores and Minerals- includes iron ore, and all processed minerals which
amounted to US$ 5466.5 million in 2012-13, US$ 5574.9 million in 2013-14
and started decreasing to US$ 5246.1 million in 2017-18.
3. Leather & Manufactures– One of the traditional items of Indian Export
is raw hides and skins. India earned about US$ 4771.9 million in 2012-13 . It
touched US $ 6030.5 million in 2014-15 and decrease to US $ 5288.9
million in 2017-18.
4. Ceramic Products & Glassware- This category also showed increasing
trend year to year. In 2012-13 this was US$ 1156.1 million which increased
to US $2131.4 million in 2017-18.
5. Gems & Jewellery- The export of Gems & Jewellery during 2012-13 was
US$ 42988.2 million and in 2017-18 it was declined to US$ 41544.4 million.
6. Chemicals & Related Products- This category includes basic chemicals,
pharmaceuticals, cosmetics, plastic, linoleum, rubber, glass, paints, enamels,
residual chemicals and allied products. This category also showed increasing
trend year to year. In 2012-13 drugs and pharmaceuticals, organic &
inorganic chemicals and plastic & linoleum were US$ 14421 million, US$
11478.8 million and US$ 5598.8 million which increased to US $17282.4,
US$ 15938.2 million and US$ 6850.9 million in 2017-18 respectively.
7. Engineering and Electronic Goods- Engineering goods includes
manufacture of metals machinery, instruments, transport equipment, iron &
steel and all electronic goods. In 2012-13 this was US$ 67434.5 million
which increased to US $ 85100.2 million in 2017-18.
8. Textiles & Textile Products- It includes cotton yarn, natural silk yarn,
manmade yarn, woollen yarn fabrics made up. In 2012-13 this was US$
27084.4 million which increased to US $ 31790.8 million in 2017-18.
9. Jute Mfg. including Floor Covering, carpets, handicrafts- The export
of this category during 2012-13 was US$ 2449.6 million and in 2017-18 it
was US$ 3587.4 million.
10. Petroleum Products - This section shows continuously decreasing trend
after 2013-14. In 2012-13 this was US$ 60865.1 million which decreased to
US $37456.6 million in 2017-18.
Table 3- Composition of major imports ( US $ million)
As per Table 3, after 2013-14, Cotton Raw, Vegetable oil, Pulses, Fruits &
Vegetables shows increasing trend. In 2013-14 it was US$ 13280.7 million and
in 2017-18 it was US$17617.7 million. Fertilizers, Crude & manufactured,
Sulphur & Unroasted Iron Pyrites, Petroleum, Crude & products, Project goods,
Professional instrument, Optical goods, etc. and gold & silver all categories
shows increasing trend in import. There is marginal negative growth in Metal
ferrous ores & other minerals. A significant positive increase in Coal, Coke &
Briquettes, etc. Leather & leather products, Organic & Inorganic Chemicals is
also shown by table 3.

III. CHANGES IN DIRECTION OF FOREIGN TRADE

The direction of trade means the countries with which we have trade
relationship .It shows our trade relationship with the countries to whom we
export and from whom we import our requirement.
Table 4 – Direction of Indian Trade ( Exports )

(Source: RBI Bulletin,2018)

As per Table 4, during 2017-18, developing countries and OECD countries

were the major markets for India’ exports with each group accounting for
39.3% share. Total exports to OECD countries was US$ 108773.8.million in
2012-13 which was increased to US$ 109622.4 million. Another major
contributor was the OPEC with 19.4% share in India’s exports. Total exports
to OPEC countries were US$ 44302.5 million. Country wise, the US
continued to be the single largest destination of India. However it’s share
decline to 12% from 13% during the previous year. Direction of India’s
export during 2017-18 indicated that the export growth to EU, OPEC,
Eastern Europe and North American Countries increased, while export to
Latin America, Asia & Oceanic and Asian & African developing countries
showed a decline.

Table 5 – Direction of Indian Trade (Imports)

 Table 5 shows that during 2017-18, OPEC had the highest share in India’s
imports (33.2 per cent), followed by developing countries (32.6 per cent) and
OECD countries (31.3 per cent). Total Imports from OPEC, developing
countries, OECD countries were US$ 109359.2 million, US$ 207173.5
million and US$ 126792.2 million respectively in 2012-18.
Country-wise, China continues to be the single largest source of imports with
a share of 14.37 percent in total imports, followed by the US (7.57 percent),
the UAE (6.39 percent), Saudi Arabia (5.70 percent), Iraq (4.91 percent) and
Switzerland (3.67 percent).

BALANCE OF PAYMENTS
Balance of Payments (BOP) statistics systematically summarises the economic
transactions of an economy with the rest of the World (i.e. transactions between
resident & non-resident entities) during a given period.
The balance of payments of a country is a systematic record of all economic
transactions between the ‘residents’ of a country and the rest of the world. It
represents a classified record of all receipts on account of goods exported,
services rendered and capital received by ‘residents’ and payments made by
them on account of goods imported and services rendered from the capital
transferred to ‘non-residents’ or ‘foreigners’ – Reserve Bank of India
The balance of payments of India is classified into:
a) Balance of payments on current account, and
b) Balance of payments on capital account
The Current account of the balance of payments of India includes three items
viz.
i) Visible trade relating to imports and exports also known as
merchandise account
ii) Invisible items which include receipts and payments for services
such as shipping, banking, insurance, travel, etc.
iii) Unilateral transfers such as donations and grants
The current account shows whether India has a favourable balance or deficit
balance of payments in any given year.
The balance of payments on capital account shows the implications of current
transactions for the country’s international financial position. For example, the
surplus or deficit of the current account are reflected in the capital account
through changes in foreign exchange reserves of a country.
OVERVIEW OF INDIA’S BALANCE OF PAYMENTS
India has undergone frequent balance of payments (BoP) crises since
independence. World macroeconomic developments as well as internal crises
have often resulted in short run controls on trade and international movement of
capital.
India has seen stress in its BoP since 1956- 57. The special events such as
droughts of 1965-66, oil price hikes of 1973 and 1979, the gulf war of 1989 as
the proximate causes of deteriorating BoP situations. As the widening trade
deficits has remained a persistent problem throughout, slow reforms in the trade
sector has been cited as the cause behind continual balance of payments deficits.
The attitude of protectionism dominated policy making until the late 1980s. It is
only after the crisis of 1991 that major reforms have been undertaken
encompassing the entire economy.
INDIA’S BALANCE OF PAYMENTS ON CURRENT ACCOUNT
In order to analyse the performance of India’s Balance of Payments on current
account, the post-independence period is divided according to the Five Year
Plan periods

Table 6. India’s Balance of Payments on Current Account (1950-51 to 2011-12)

 ( in ₹ crores)

Year Trade Net Balance of

Deficit Invisibles Payments
First Plan -542 500 -42
Second Plan -2339 614 -1725
Third Plan -2382 431 -1951
Annual Plan -2067 52 -2015
Fourth Plan -1564 1664 100
Fifth Plan -3179 6221 3082
Annual Plan -3374 3140 -234
Sixth Plan -30456 19072 -11384
Seventh Plan -54204 13157 -41047
Annual Plan -23428 3826 -19602
Eighth Plan -149004 86090 -62914
Ninth Plan -302334 249159 -53175
Tenth Plan -776474 770823 -5651
Eleventh Plan -2982716 2025906 -956910
Source : Economic Survey (2011-2012)

1) The First Plan Period (1951-52 to 1955-56) – The balance of payments

was affected by the Korean War boom, American recession of 1953 and
favourable monsoon at home which helped to boost agricultural and
industrial production. While India had been experiencing persistent trade
deficit, she had a surplus in net invisibles, accordingly India’s adverse
balance of payment during the First Plan was only ₹ 42 crores.
2) The Second Plan Period (1956-57 to 1960-61) – The Second Plan Period
was characterised by a huge deficit in the balance of trade coupled with
increased earnings on account of invisibles and donations. Thus, the
unfavourableness in the balance of payments during the Second Plan was of
the order of ₹ 1725 crores. This was the result of :
a) Heavy imports of capital goods
b) Failure of agricultural production to meet the growing demand
from the rapidly growing population
c) Inability of the economy to increase exports
d) Necessity of making minimum ‘maintenance imports’ for a
developing economy like India
3) The Third Plan Period and the Annual Plans (1961-62 to 1968-69)-
From Table 6, it is clear that the balance of payments on current account
was unfavourable to the order of ₹ 1951 crores and ₹ 2015 crores during
the Third Plan and the Annual Plans respectively. This was mainly due to:
 a) Imports expanded faster as the impact of defence and
development and to overcome domestic shortages
b) Exports were extremely sluggish and failed to match the
imports
The current account imbalances was financed by loans from foreign
countries, PL 480 and PL 665 funds, loans from World Bank and from
I.M.F. Consequently, heavy amount had to be paid in the form of interest
on such loans. This wiped out the surplus in the net invisibles and the
influence in reducing balance of payments deficit was negligible.
4) The Fourth Plan Period (1969-70 to 1973-74) – The Government
managed to restrict imports and succeeded in boosting its exports. The net
invisibles also had a surplus of ₹ 1664 crores due to receipt of ₹ 1680
crores from USA. The trade deficit stood at ₹ 1564 crores. The net result
was a surplus in the balance of payments for the first time with a nominal
amount of ₹ 100 crores.
5) The Fifth Plan Period (1975-76 to 1978-79) – During the Fifth Plan there
was a persistent rise in imports due to hike in oil prices and value of exports
was also rising to decline in export prices. These factors were responsible
for the revival of trade deficit at the order of ₹ 3179 crores. There was a
sharp increase in net invisibles receipts amounting to ₹ 6261 crores. Thus,
India was able to have huge balance of payments surplus of ₹ 3082 crores.
For the first time since planning period, India was in a comfortable position
in its external account.
6) The Annual Plan and the Sixth and Seventh Plan Period ( 1979-80 to
1989-90) – As against the surplus balance of payments experienced in the
Fifth Plan Period, India started experiencing adverse BoP from 1979-80
onwards and the deficit amounted to ₹ 234 crores. This was due to the
tremendous rate of growth of imports and a much lower rate of growth of
exports since the Annual Plan.
The current BoP became adverse to the tune of ₹ 11384 crores during the
Sixth Plan. India had to meet the deficit in the current account by
borrowing from IMF and by withdrawing SDRs. India also used a part of
its accumulated foreign exchange reserves to meet the BoP deficit.
During 1985-86 to 1989-90, the total trade deficit amounted to ₹ 54204
crores and the deficit in BoP on current account was ₹ 41047 crores
during the Seventh Plan.

7) The Annual Plans (1990-91 to 1991-92) – For the first time during the last
40 years since planning period , net invisibles became negative to the tune
 of ₹ 433 crores in 1990-91 due to net outflow of investment income. Thus,
the cushion available through net invisibles to partly neutralise the trade
deficit was removed. As a result the deficit in Bop on current account was
₹ 19602 crores.
8) The Eighth and Ninth Plan Period (1992-93 to 2001-02) – During the
Eighth Plan, trade deficit had been mounting and has reached a record level
of ₹ 149004 crores which was almost six times of the trade deficit during
1990-92. Invisibles neutralised the trade deficit but despite this, the BoP
has shown a continuous deficit amounting to ₹ 62914 crores.
Taking the entire Ninth Plan Period (1997-97 to 2001-02), the surplus of
net invisibles account wiped out the trade deficit. Consequently, the total
deficit in current account balance was of the order of ₹ 53175 crores for the
Ninth Plan.
9) The Tenth Plan Period (2002-03 to 2006-07) – During the Tenth Plan, our
trade balance showed a massive deficit, a big inflow of net invisibles which
resulted in a positive balance on current account. The huge trade deficit on
account of an unprecedented increase in imports would often show a
positive balance on current account due to the neutralisation by the net
invisibles receipts. However, the situation worsened due to import
liberalisation resulting in the total deficit in BoP on current account of the
order of ₹ 5651 crores.
10) The Eleventh Plan Period (2007-08 to 2011-2012) – During the
Eleventh Five Year Plan, the situation worsened as net invisibles fell short
of trade deficit which resulted in heavy deficit of balance of payments to
the tune of ₹ 956910 crores. Due to huge balance of trade deficit, surpluses
from invisibles could hardly cover 67.9% of trade deficit as against to
99.3% during the Tenth Five Year Plan.

Recent Data Trend

India's current account balance posted a marginal surplus of USD 0.6

billion in the Jan-Mar quarter 2020, as against a deficit of USD 4.7 billion
in Jan-Mar 2019 and USD 2.6 billion in the previous quarter. It is
noteworthy that this is the first quarterly current account surplus since the
Jan-Mar quarter of 2007. It is primarily on account of lower trade deficit at
USD 35 billion and a rise in net invisible receipts (which includes services,
primary and secondary income) at USD 35.6 billion.

The lower trade deficit is a result of the sharp decline in demand at both the
national and international levels following the implementation of COVID-
19 lockdowns and a fall in global crude oil prices since the beginning of
2020.

POLICIES TO IMPROVE TRADE AND BALANCE OF

PAYMENTS

There are a number of policies that can be introduced to achieve an

improvement in a country's trade balance – some of them focus on
changing the growth of demand, others look to improve the supply-side
competitiveness of an economy.

Demand management: Reductions in government spending, higher

interest rates and higher taxes could all have the effect of dampening
consumer demand reducing the demand for imports. This leads to an
increase in spare productive capacity which can then be allocated towards
exporting.

A lower exchange rate: The central bank of a country might decide that a
lower exchange rate provides a suitable way of improving competitiveness,
reducing the overseas price of exports and making imports more expensive.
For those countries operating with a managed exchange rate, the
government may decide to authorise intervention in the currency markets to
manipulate the value of the currency.

Supply-side improvements:
 Policies to raise productivity, measures to bring about more
innovation and incentives to increase investment in industries with
export potential are supply-side measures designed to boost exports
performance and compete more effectively with imports. The time-
lags for supply-side policies to have an impact are long.
 Policies to encourage business start-ups, successful small
businesses with export potential
 Investment in education and health-care to boost human capital
and increase competitiveness in fast-growing and high value
industries such as bio-technology, engineering, finance, medicine
 Investment in modern critical infrastructure to support businesses
and industries involved in international markets
Protectionist measures such as import quotas and tariffs are rarely used
because of our commitments to the World Trade Organisation and our
membership of the European Union.

In conclusion, the problem of adverse balance of payments of India is

essentially due to the huge trade deficit which, in turn, is partly the result of
persistently rising imports and partly due to slowly rising exports. The
ultimate solution has to be found in restricting imports to the unavoidable
minimum through import substitution and promoting exports to the
maximum.