UNIT 4 INDIA’S FOREIGN TRADE

Structure
4.0 Objectives
4.1 Introduction
4.2 Importance of Foreign Trade
4.3 Trends in India’s Foreign Trade
4.3.1 Trade Balance
4.4 Composition of Foreign Trade Main Imports and Exports of India
4.4.1 Agri Trade
4.4.2 Trade in Services
4.5 Direction of Foreign Trade
4.6 Major Problems and Challenges of India’s Foreign Trade and Policy
4.7 Thrust Areas of Foreign Trade
4.8 Let Us Sum Up
4.9 Key Words
4.10 Terminal Questions
References

4.0 OBJECTIVES
After going through this unit, you will be able to:
• Highlight significance of foreign trade in Indian economy;
• Analyze the broad trends in India’s foreign trade;
• Explain the composition of India’s exports and imports;
• Describe the direction of India’s foreign trade;
• Discuss the major problems and challenges of India’s foreign trade;
• Point out thrust areas of India’s foreign trade.

4.1 INTRODUCTION
Foreign trade is concerned with trade between different countries of the world. Export refers to
selling goods and services to other countries, while import means buying goods and services

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from other countries. It is also known as international trade, external trade or inter – regional
trade. No country in the world is endowed with adequate resources and facilities to produce all
the goods and services that it needs. This being the major rationale to have international trade
among countries for the exchange of goods and services they need. India buys from and sells the
goods and services to countries across the world.

Foreign trade helps domestic industries to expand their business in domestic economy as well as
exports to other country (Botre, 2018). Export of goods and services to other countries gives
more foreign exchange and every country concentrates on the export of its goods than the import.
It involves different currencies of different countries and is regulated by laws, rules and
regulations of the concerned countries making international trade more complex.

India’s foreign trade have played crucial role in the economic development of the country.
Increasing international trade is an aspect of the continuance of globalization. India's trade and
external sector has a significant impact on the GDP growth and expansion in per capita income.

India’s foreign trade has witnessed structural changes in terms of volume, composition and
direction over the period of 75 years after independence. Pertaining to export composition,
capital intensive commodities have replaced labour intensive commodities. Share of developing
countries in India’s total trade has witnessed a rise vis-à-vis decline in share of developed
countries.

Since 1991 India introduced economic reform and foreign trade constituted an important
component of such measures. However, India’s trade regime and regulatory environment still
remains relatively restrictive. The Department of Commerce of the Ministry of Commerce and
Industry at the level of Central Government has responsibility to manage foreign trade
operations.

It is important note that the low world share of India’s exports, does not reflect the importance of
foreign trade for the Indian economy. All-out efforts are being made by the government to raise
the share of India in the global exports. In this unit, we will analyze importance, the major
changes in volume, trends, composition and direction of exports and imports and highlight the
growing importance of services trade and foreign trade policy. Along with this, the message of

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this unit is to have various facets and perspective on challenging issues and thrust areas in India’s
foreign trade in the global context.

4.2 IMPORTANCE OF FOREIGN TRADE IN INDIA

Trade is the lifeline of any nation which helps in economic growth and nation's development.
Foreign trade has been considered as an engine of growth. It has got an important place in the
economic development of India. Indian economy and foreign trade are closely interlinked and
have a significant impact on growth and trend of GDP and in per capita income. It is a crucial
part of development strategy and is an effective mechanism of financial growth, job
opportunities and poverty reduction in the economy. Importance of foreign trade can be stated in
the following way:

(i) optimum use of resources of the country;

(ii) economies of large scale production;
(iii) making available necessary inputs for industrialization;
(iv) dilution of monopoly power;
(v) providing outlet for surplus production;
(vi) earning much needed foreign exchange;
(vii) promotion of economic development, creation of job opportunities and help
reduce poverty in the country;
(viii) generates revenue for the government;
(ix) helping the country to deal with the periods of natural calamities (droughts,
floods, etc.) through import of food grains, other necessary consumer goods,
medicines etc.

Indian economy is growing rapidly and getting recognition worldwide. Shankar (2022) has very
succinctly remarked that during the year 2022, international trade is being buffeted by:

(i) a continuing global pandemic,

(ii) a European war,
(iii) widespread economic sanctions,
(iv) battered supply chains, and

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 (v) sudden national bans and caps on exports of essential commodities.

“Perhaps paradoxically, this may be the time to re-emphasises the critical importance of trade for
sustained prosperity”.

It is well to remember that trade is not an end in itself, but a means to economic growth and
national development. Globalization is playing an important role in export-led growth, leading to
increase in employment in the country. In India, the government initiated some changes in its
strategy on trade, foreign investment, and tariffs. An appropriate and skillfully designed foreign
trade policy is essential for India’s rapid economic growth.

4.3 TRENDS IN INDIA’S FOREIGN TRADE IN THE POST-REFORM PERIOD:

1991-2022
Since independence India’s foreign trade has undergone a substantial change in terms of trends
in value, volume, composition as well as the direction of trade. Accordingly, there have been
significant structural shifts not only in the product basket, but also in the geographical
composition of India’s foreign trade. The opening up of Indian economy led to an increase in the
foreign trade, which aided in sustained GDP growth since the beginning of the 21st century.
During these years Indian exports have increased by 17 times and imports by 19 times. As per
the WTO data for 2020, India’s total export was US $ 276 billion and India’s share in global
exports for merchandise was 1.6 percent and its rank was 21 India’s total import valued at US $
372 billion in global imports its share was 2.1 percent and ranked 14. As regards services sector,
India’s total export was US $ 203 billion and India’s share in global services exports was 4.1
percent and ranked 7. Whereas, India’s total services import valued at US $ 153 billion, having a
share of 3.3 percent and ranked 10 in the same year. India’s share in global merchandise exports
has risen from 0.6 percent in early 1990s to 1.6 percent in 2020, and similarly the share of
imports has risen from 0.6 percent to 2.1 percent during the same period. India also, ranked as
the 21st largest exporter and 14th largest importer in the world in 2020. (WTO’s World Trade
Statistical Review 2021, Table A6 and A8 P-58 and P -60,
https://www.wto.org/english/res_e/statis_e/wts2021_e/wts2021_e.pdf)

Trade-GDP ratio: India’s trade to GDP ratio is a measure of an economy’s openness and
integration into the global economy. It has witnessed a phenomenal increase since the beginning

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of 21st century. Trade is the sum of exports and imports of goods and services measured as a
share of gross domestic product. India has liberalised astonishingly complex and restrictive trade
regime in 1991 and made the exchange rate market-responsive. India’s trade-to-GDP ratio,
which had hovered between a measly 8 and 17 per cent between 1950 and 1991, rose smartly to
26 per cent by 2001 and peaked around 56 per cent in 2011. The total (goods and services)
exports share of GDP touching nearly 25 per cent, helped significantly by the rise in software
exports. Since 2011, India’s trade share in GDP had declined to 43.68 per cent by 2021, mainly
because of the stagnation of her merchandise exports. (Table 1)

Table 1: India’s trade to GDP ratio

Year Trade as % of GDP

2021 43.68%

2016 40.08%

2011 55.62%

2006 45.72%

2001 25.99%

1996 21.93%

1991 16.99%

1981 14.51%

1971 7.67%

1961 10.26%

Source: World Bank (2022) (https://www.macrotrends.net/countries/IND/india/trade-gdp-ratio)

Volume of trade: In this section, the trends in value and volume of trade is analysed. The volume
of trade constitutes total of both imports and exports. There has been an overall increasing trend
in India's total volume of trade.

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 Table 2- Trends in India’s foreign Trade (Values in US $ million)
Year to Exports Imports Trade Balance
1950-51 1,269 1,273 -4
1970-71 2,031 2,162 -1,301
1980-81 8,486 15,869 -7,383
1990-91 18,143 24,075 -5,932
2000-01 44,560 50,536 -5,976
2008-09 168,704 287,759 -119,055
2010-11 251,136 369,769 -118,632
2016-17 276,547 382,740 -106,193
2017-18 303,526 465,581 –162,054
2018-19 330,069 514,034 -183,964
2019-20 313,138 473,995 -160,856
2020-21 291,808 394,435 -102,627
2021-22 (Provisional) 422,004 613,052 -190,047
Source: RBI’s Handbook of Statistics on Indian Economy 2022 (Table 115)

Volume of exports: The total volume of India’s exports trade was only US $ 1269 million in
1950-51 which after thirty years increased to US $ 8486 million in 1980-81. In the next ten years
it stood at US $ 18,143 million in 1990-91. However, in the next decade there has been a
spectacular increase of two and half times in 2000-01 when exports mounted to US $ 44,560
million. Exports further increased to US $ 251,136 million in 2010-11. During the course of next
decade exports surged to US $ 291,808 million in 2020-21 (Table 2).

During two decades (1950-70), India’s export has grown at a very slow rate, but it gathered
improvement during 1971-91. This improvement in exports growth during 1970’s was mainly
due to the devaluation and fiscal incentives. India’s exports have covered a long distance, during
post reforms era, Indian exports have shown remarkable improvement with varying rates.
Volume of trade rose up and composition of trade was also frequently changed. The exports have
revealed significant strength and dynamism.

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However, Amita Batra’s recent book, on India’s Trade Policy in the 21st Century, demonstrates
India’s failure to participate effectively in the rapid increase in global-value-chain-based trade
after 2000. The marked rise in India’s tariffs and other protective measures after 2015 also
militated against buoyant expansion of the country’s goods exports, both within and outside
global value chains (GVCs).

The Indian economy has slowed due to factors related to the global COVID-19 pandemic, but
recovered in 2021-22. India’s exports surpassing the pre-pandemic level of US $331 billion in
FY 2018-19 and reaching with provisional figures of US $422 billion in FY 2021-22 is certainly
an achievement despite global macroeconomic headwinds. Since the beginning of calendar year
2021, merchandise exports were on a steep upward curve with both agriculture and
manufacturing contributing to the surge. High technology sectors provided the boost to
manufacturing exports, promising the much-needed diversification to the export basket. India has
never had it this good for exports, it is the highest ever after 14 long years exceeding the target
set by the government.

Services export too is at a historic high of $255 billion during 2021-22. India's trade performance
in 2021-22 was aided in large measure by recovery in advanced economies. This milestone on
the trade front is a sign of a rising India, which would certainly accelerate the growth. Moreover
the increasing imports are a good sign given the high import intensity of India’s exports. To
achieve India’s exports’ potential, it is important to sustain the export momentum.

Volume of India’s imports: Along with trends in exports, there has been continuous increase in
imports as well. One can find an overall increasing trend in India's imports. As compared to the
period of 1970s, there has been a sharp increase in the import during post-reforms period. The
process of structural reforms has further increased India’s imports. Increase in imports has been
greater than exports causing trade deficit. Since overall growth of imports exceeded that of
exports, the trade deficit witnessed a substantial rise.

4.3.1 Trade Balance/Trade Deficit

In the total foreign trade, the exports are increasing at a decreasing rate but the imports are
increasing at an increasing rate. As a result, the balance of trade has become unfavorable to
India. India’s foreign trade has exhibited a sharp transformation since 1991. However, along with

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these changes there has been a widening trade deficit on trade account. In 1950-51 trade deficit
was US $ 4 million in 1980-81 it increased to US $ million 7383. In 1990-91 it was decreased to
US $ 5932 million, but there has been a very sharp increase in deficit in the post reform period.
During 2021-22 it increased to US $ 190,047 million. (See Table 2)

Trade balance has never been favourable for India since independence, barring few years. The
gap between exports and imports make wider during 1991-92 to 2021-22. India's trade balance is
structurally negative, given that the country imports nearly 80 percent of its energy needs,
leading to trade deficit oscillating very frequently. Moreover, imports are growing at an even
faster clip, as demand picked up and most industries got back to pre-Covid levels of production.
As a result, the trade deficit in 2021-22 crossed $190 billion (Srinivasan, 2022). That is a bit of a
concern, but as long as the trade deficit is matched by strong economic growth, it is not that
worrisome.

The problem is not with India’s rising imports or the widening balance, per se. The problem is
with the nature of the surge in imports and the composition of the trade imbalance. Crude
imports shot up substantially, driven by the spike in energy prices caused by the Russia-Ukraine
war. Contributing to this high trade imbalance was the slowing of merchandise exports and the
consistent rise in imports. Higher merchandise imports reflect the woes of an import-dependent
economy. Rising imports have, thus, become inevitable due to the structural characteristics that
the Indian economy has acquired over the past three decades, during its global economic
integration. But while its imports have risen, India’s exports have not responded adequately
(Dhar and Rao, 2022).

The trade patterns suggest that the increasing merchandise trade deficits in India cannot be
blamed on external or global factors. They are likely much more the result of domestic economic
tendencies, and therefore should be of greater concern for policymakers (Chandrasekhar and
Ghosh, 2022). India has maintained trade surplus in all the major services. However, the trade
surplus has shown fluctuations in the past five years. In fact, China alone accounted for slightly
less than one third ($73.31 billion) of India’s total trade deficit ($191 billion) during 2021-22.

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Check Your Progress A
1. Indicate trends in India’s foreign trade share in GDP.
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2. What is the position of India’s exports and imports in global trade?
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3. Write three importance of foreign trade in Indian economy.
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4. Write three point out the reasons for continuing trade deficit.
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4.4 COMPOSITION OF FOREIGN TRADE

Composition of foreign trade refers to the items of imports and exports. It provides information
on a country’s imports and exports of commodities revealing a nation’s structure and level of
economic development. Over the last seven decades, India’s foreign trade has undergone a
complete transformation in terms of composition of commodities, particularly after the
liberalization of 1991.

Composition of Imports: As of 2023, India imports petroleum oils, gold, diamonds, coal and
similar solid fuels, petroleum gas and other gaseous hydrocarbons. At the time of independence,
the composition of India’s import basket included oils, pulses, machinery, chemicals, hardware,
pharmaceuticals, dyes, yarns, paper, grains, non-ferrous metals, cars, and other items.

The total merchandise imports witnessed a growth of more than 26 folds during 1991-2019 (Gite
and Sonkar, 2020). The imports are increasing at higher rate than the exports during the same

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period. Import demand is strong with 19 out of 30 principal categories posting higher growth
during 2019-22. Higher imports is emerging in accelerated infrastructure build-up as well as
India's pivot to manufacturing exports. The composition of India’s imports is categoriesed into
three: raw materials, capital goods, and consumer products.

Table 3: Imports of Top 10 Commodities in 2020-21 (Values in US $ billion)

Commodity 2019-20 2020-21 April-December Share% in
2021 2020-21
Petroleum, crude and 130.55 82.68 118.26 20.96
products
Electronic goods 54.40 54.29 50.99 13.76
Gold 28.23 34.60 38.02 8.77
Machinery, electrical and 37.69 30.08 28.68 7.63
non-electrical
Organic and inorganic 20.62 19.83 22.40 5.03
chemicals
Pearls, precious and semi- 22.46 18.89 22.09 4.79
precious stones
Transport equipment 25.28 18.65 12.25 4.73
Coal, coke and briquettes, 22.46 16.27 21.63 4.13
etc.
Artificial resins, plastic 14.63 13.51 14.78 3.43
materials, etc.
Iron and steel 15.37 12.04 12.48 3.05
Source: Annual Report 2021-22 (Ministry of Commerce and Industry, Department of
Commerce, P-30)

Raw materials: Raw materials includes Petroleum oil, lubricants, edible oil, iron and steel,
fertilisers, non-ferrous metals, precious stones, pearls, and other commodities. The percentage of
total imports made up of all of these commodities registered significant increase since 1991. As
of 2023, concerns about supply disruptions have risen due to Russia’s invasion of Ukraine,
bringing oil prices to multi-year highs. India’s oil imports constitutes around 80 percent of its

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energy needs. Due to rising international oil prices, higher mobility, and a corresponding
increase in domestic and foreign oil consumption, petroleum imports climbed significantly from
US $ 72.4 billion in FY21 to US $ 141.7 billion in FY22.

Capital goods: Capital goods constitute Non-electrical and electrical machinery, metals,
locomotives, and other transport equipment, among other things, fall into this category. These
items are necessary for the country’s industrial development. Capital goods imports accounted
for roughly 32 percent of overall imports in 1960-61. This gradually decreased, and in 2021-22,
it was around 22 percent and it is a good sign.

Consumer products: It involves importing electrical items, food grains, medications, and paper,
among other things. Until 1966, India had a severe food grain shortfall. As a result, India would
import enormous amounts of food grains. Presently, India has become self-sufficient in food
production.

India is heavily dependent on raw materials like active pharmaceutical ingredients (APIs),
organic chemicals, iron and steel (imports of iron and steel can be attributed to India's
commitment to building more physical infrastructure). As per UN COMTRADE database on
international trade data, in 2021 India imported electrical and electronic equipment worth $26.39
billion.

It is important to note that India’s import basket has undergone a shift away from raw materials
to intermediate and capital goods over the last two decades. Nevertheless, the share of capital
goods in India’s total imports at 22.8 per cent is significantly lower than economies with higher
export intensity (Jain, et al, 2022).

Composition of Exports

India’s export composition can broadly be classified into two categories: traditional exports and
non-traditional exports.

Traditional Products: These include coffee, tea, jute goods, iron ore, animal skin,
cotton, minerals, fish and fish products, etc. These products accounted for nearly
80 percent of India’s overall exports at the time of independence. However, in the

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 contemporary environment these items’ contribution is gradually decreasing,
while non-traditional items’ contribution is increasing.

Non-traditional Products: This category is composed of engineering goods,

sugar, chemicals, electrical goods, iron and steel, leather goods, gems, jewellery,
sports goods, toys, project goods etc.

Exports have registered a significant structural changes particularly after 1990-91. India
continues to export traditional items, but the percentage share of non-traditional goods in both
exports and imports basket has been increasing continuously. Some notable items of exports like
chemicals, engineering and electronic goods, drugs and pharmaceuticals have shown a high
growth rate. Right from the beginning of 21st century, hand made goods including gems and
jewellary have become one of the important items in India’s export basket.

India's total merchandise exports registered more than 18 folds increased with variations during
the period 1991-2019 (Gite and Sonkar, 2020). As a result of Russia-Ukraine conflict, there has
been exports setback. Growth in only 15 out of 30 major product groups is of concern and unless
global economic growth and the geopolitical situation improve drastically. India’s merchandise
exports have been falling, in both value and volume. Among non-oil exports, in a downswing,
the largest decline is in the categories of textiles, agriculture products and gems and jewellery.
Mobile handsets, drugs and pharma are also contracting. These high-skill export categories had
been leading the exports buoyancy.

Table 4: Exports of Top 10 Commodities in 2020-21 (Values in US$ billion)

Commodity 2019-20 2020-21 Share% in 2020-21
Engineering goods 78.70 76.72 26.29
Gems and jewellery 35.90 26.02 8.92
Petroleum products 41.29 25.80 8.84
Drugs and pharmaceuticals 20.70 24.44 8.38
Organic and inorganic chemicals 22.08 22.09 7.57
RMG of all textiles 15.49 12.27 4.21
Electronic goods 11.70 11.09 3.80

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Cotton yarn/fabs./made-ups, 10.03 9.83 3.37
handloom products etc.
Rice 6.40 8.83 3.03
Plastic and linoleum 7.55 7.46 2.56
Source: Annual Report 2021-22 (Ministry of Commerce and Industry, Department of
Commerce, P-30)

It is important to note that exports are not merely a source of earning foreign exchange but also
boosting India’s manufacturing sector, creating large-scale economic activity and generating
fresh employment opportunities. Following three items in the non-traditional export category
deserve special mention:

Defence exports amounts to Rs 13,000 crore during FY21-22, and the private sector
accounting for 70 per cent of the exports (Pant and Bhan, 2022).

The gems and jewellery (G&J) sector contributed nearly 10 percent of the target of $400
billion exports in 2021-22 (Shah, 2022).

Toy is relatively a new focus item in India’s foreign trade. There has been a remarkable
transformation in India’s $1 billion toy industry. India’s toy imports, essentially from
China, have fallen by 70 per cent during the last three years from $371 million in 2018-
19 to $110 million in 2021-22, while exports have risen 61.4 per cent in the same period,
from $202 million to $326 million. The industry has turned into a net foreign exchange
earner since 2020, after being a net importer to the tune of $150-200 million or more in
the three or four years that preceded it. Indian toys can become world beaters, with
supportive policies and niche products (The Hindu Business Line Opinion August 08,
2022).

It is remarkable that India transformed itself from a predominantly primary goods exporting
country into a non-primary goods (manufactured goods) exporting country. The structural
changes in the composition of commodities in India’s export particularly, after opening and
integration of Indian economy to the world economy. Manufacturing holds an important part of
India’s exports growth.

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Structural change in India’s exports and its policy implication: Veeramani’s (2012) study on
“Anatomy of India’s Merchandise Export Growth, 1993-94 to 2010-11”, has highlighted an
important fact which has larger policy implication for exports promotion. The study states that
most striking aspect of the structural change in India's exports is that the share of capital-
intensive products more than doubled. The capital-intensive groups such as transport equipment,
machinery, and base metals registered higher growth than the traditional groups like textiles. The
high growth of mineral products has been driven by petroleum products. The share of petroleum
products in India's export basket increased dramatically from about 2 percent in 1993 to as high
as 13.7 percent in 2019. This export surge has been driven mainly by India's private sector oil
refineries.

There has been a consistent structural change in export leading to increase in the shares of human
capital and technology-intensive products and a consistent decline in the shares of natural
resource and unskilled labour-intensive products. The phenomenal growth of ‘mineral products’
has been driven by ‘mineral fuels and oils’ while ‘organic chemicals’ and ‘pharmaceutical
products’ are responsible for the export growth of ‘chemical products’. The export growth of
‘machinery’ has been driven primarily by ‘electrical machinery and equipments’ while the
growth of ‘transport equipments’ has been brought about by ‘vehicles other than railway or
tramway rolling-stock’ and ‘ships, boats and floating structure’.

A total of 68 dynamic products have been identified, of which 50 belongs to the capital-intensive
category and the remaining 18 belong to the traditional category. The combined share of these 68
products in India's total exports increased very fast. The capital-intensive category as a whole
contributed to 56 percent of India's total exports. This indicates a high degree of concentration in
export activity.

4.4.1 Agri Trade

Agricultural and Processed Food Products Export Development Authority (APEDA) has been
given mandate for export promotion of all agri products. These products have been broadly
divided under 27 categories, except tea, coffee, spices and marine products. The opening of non-
basmati rice export, removal of the minimum export price (MEP) on basmati export, spike in
guar gum exports and the cleaning up of the meat industries, all within 2008 to 2012, contributed

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to growth of agri exports and it stood at $35.60 billion by 2019-20. It increased to $50.21 billion
in 2021-22. India's recent spurt in agricultural exports is commendable but, there have been wild
swings contributed by the policy of 'switch on' and 'switch off'.

According to the WTO, India’s share in world agricultural exports stood at 1.7 percent in 2010
which increased to 2.1 percent in 2019. However, India’s rank in worldwide agricultural exports
slipped to 16 in 2019 from 17 in 2010. Agriculture export policy of December 2018 envisages
increase in farm exports from $30 billion to $100 billion. However, the bulk of the increase can
be attributed to a large spike in exports of very few products like rice, wheat and sugar. India is
not known to be a regular exporter of wheat. But the export jumped to 7 million tonnes in 2021-
22. This was caused primarily by the war in Ukraine and, therefore, may not be sustainable
(Tripathy, 2022).

Tripathy (2022) (principal adviser to the chief minister, Government of Odisha) has highlighted
the fact that “import bills for agri products are rising at a much faster pace. It has grown from
$15.4 billion in 2013-14 to $32.4 billion in 2021-22. While the compound annual growth rate
(CAGR) in import is 6 percent, it is only 2 percent for exports during the same period. The
import of apples from Iran and Turkey has increased at a dramatic pace, while domestic
production in Kashmir and Himachal Pradesh has stagnated. The import of exotic fruit, olive oil,
almonds, etc, is rising very fast. Fresh fruit, pulses, spices and cashew - food items for which
India has excellent agro-climatic conditions - now comprise a sizeable portion of the import
basket”.

The import bill of vegetable oil (palm oil, soyoil, sunflower oil) rose to $19 billion for 2021-22.
Pulses, spices, cashew and others have a combined import bill of nearly $9 billion. India used to
be a leading cashew producer. Emerging countries like Ivory Coast and Vietnam have taken over
with much better yields. Ideally speaking, the large public expenditure in agriculture should have
shifted production to high-value crops. However, that has not happened (Tripathy, 2022).

India’s credibility as a supplier of agricultural products getting diluted because of export

restrictions on agri products. India’s policy stance has been vacillating between export bans,
export restrictions, minimum export price and free trade. Such policy changes also hurt the
image of India as a reliable supplier of agri commodities. This kind of ad-hocism is not helpful

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for enduring objective of increasing farm exports. These restrictions go against the spirit of
government’s own agri export policy of 2018, in which farmers were assured of a “transparent
and consistent” policy.

Shunmugam and Singh (2022) have stressed the fact that “global agricultural trade has always
been fickle. Concerns over phytosanitary issues make export of unprocessed agricultural
commodities more sensitive. Identifying target importing nations and developing policy-level
interactions and relationships will be critical to sustaining India’s exports”.

Further, Singh and Singh (2022a) have observed that “the world economy is passing through a
difficult phase with a series of economic disruptions resulting in rising food protectionism
around the world. The major producers curb agricultural exports, adding to the supply shock and
enhanced price volatility in the international market. An economy with 1.4 billion people to feed,
India needs to carefully plan to manage its internal political economy”.

4.4.2 Trade in Services

India’s services trade has been a major driver of its exports over the past two decades. India’s
services sector covers a wide variety of activities such as trade, hotels and restaurants, transport,
storage and communication, financing, insurance, real estate, business services, community,
social and personal services, and services associated with construction.

Matore and Sagar (2015) have pointed out that the trends towards globalization, reinforced by
liberalization policies and the removal of regulatory obstacles, have fuelled steady growth of
international investment and trade in services. Trade in services as percentage of India’s GDP
continues to increase. It was 4 percent in 1991 rising to 7.7 percent in 2000, further increased to
11.7 percent in 2010 and it stands at 11.9 percent in 2021.

Services exports have grown more rapidly than merchandise exports. Private transfer mainly
representing remittances by Indians employed overseas and India continues to be the largest
remittance recipient country in the world in 2021. A substantial part of the growth in remittances
has also come from the software industry. This component rose from $2.1 billion in 1990–91 to
$12.2 billion in 2001–02 (Panagariya, 2004). The information technology (and IT-enabled
services) sector dominates India’s service exports.

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India’s services exports have significantly grown. India’s services exports recorded growth of
18.4 per cent to US$ 177.7 billion during 2021-22 (April-December). The trade in services has
been growing faster than the merchandise trade, and the share of services in the total export trade
has been increasing. The software services were mainly responsible for the surplus in services
trade. There had been considerable growth in transport, travel, and other services, such as
telecommunications, financial, construction, and legal. Over the years, the composition of
services exports from India has undergone considerable change.

An analysis of services exports from India reveals that the largest services segment, software and
IT-enabled services, has graduated to newer services. These services includes: packaged
software implementation, systems integration, network infrastructure management, and IT
consulting. Under the miscellaneous services segment, India’s entertainment industry covers
film, music, broadcast, television, and live entertainment and is basically an intellectual-
property-driven sector with small to large players spread across India. Education process
outsourcing includes imparting online education, training, and coaching, and other related
services through the Internet and has emerged as a significant segment for services exports. The
travel and tourism sector has also shown significant growth in recent years (See Table 5).

Jana et al (2020) have highlighted the fact that “the service sector in India has been highly
structured and organized. The sector is featured with high technology-base with utmost
sophistication in operation, the involvement of trained and skilled labor, less dependency on the
natural environment, short payback period on investments, etc. The continuous efforts from the
policymakers to remove many trade barriers to services make the sector much more attractive for
foreign investors”.

Despite being the seventh largest exporter of services with a global share of 3.3 per cent during
2010-21, India enjoys comparative advantage only in computer services (including software)
covered under the category of telecommunication, computer and information services (Jain, et al,
2022).

Coming to the close this section, the suggestion made by Jain et al (2022) are worth mention,
“While services exports accounted for 22 per cent of total exports globally during 2010-21, the
share of India’s services exports was much higher at 36 per cent. Further, world trade in services

18
has been more resilient than merchandise trade in the post-global financial crisis (GFC) period,
which provides an upside potential for growth in low labour cost economies like India. While the
pandemic and the resultant supply chain disruptions severely impacted world trade in
commercial services in 2020, India’s net exports of services were relatively resilient, primarily
on the back of robust software exports earnings. India needs to tap the post-pandemic global
opportunities arising from accelerated digital investment with a growing focus on contactless
commerce, live commerce, and B2B consumerisation”.

India’s Imports of Services: Imports of commercial services are the most important category of
services imports, followed by transportation and travel. The surge in services imports is mainly
on account of payments for business, transport, travel and computer services, which together
constitute more than 75 per cent of services imports. Business services with the largest share in
services imports grew. Amid resumption in global activity coupled with international shortage in
shipping vessels, transportation costs escalated, resulting in large increase in transport payments
(See Table 5).

The table 5 Services exports and imports from 2011-2021.

Table: 5 Services Trade (Values in US$ billion)
Year Exports Imports Net of Services
2011-12 142.32 78.23 64.10
2012-13 145.68 80.76 64.91
2013-14 151.81 78.75 73.07
2014-15 158.11 81.58 76.53
2015-16 154.31 84.63 69.68
2016-17 164.20 95.85 68.34
2017-18 195.09 117.53 77.56
2018-19 208.00 126.06 81.94
2019-20 213.19 128.27 84.92
2020-21(P) 206.09 117.52 88.57
April-December 2021* 177.68 103.30 74.39

19
Source: Annual Report 2021-22 (Ministry of Commerce and Industry, Department of
Commerce, P-29), P stands for provisional and * quick estimate

The latest data available with United Nations Statistics Division shows US $ 205 billion of
services exported in 2020, whereas a total of US $ 112.6 billion of services imported during the
same year.

Check Your Progress B

1. Mention three important changes in composition of exports.

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2. Point out major changes in composition of India’s imports.

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3. Write trends in services trade.

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4. Indicate the composition of services trade.

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5. What is Agri trade and its composition?

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4.5 DIRECTION OF INDIA’S FOREIGN TRADE

The direction of trade means the countries with which India has trade relationship. Direction
indicates the countries where India sends its exports and from countries with whom India imports
its requirements. Through the introduction of economic reforms in 1991, there has also been an
enlargement of the direction of India’s foreign trade with the new countries and regional trading
blocs. Before these reforms, India’s exports were limited to OECD and OPEC countries but after
the new economic policy the country turn towards the new Asian countries and consequently
China became a major trading partner of India. In terms of direction, traditionally EU and USA
was the major trading partners of India but since 2010 this scenario has been changed and India’s
trade is increasing mainly with East Asian countries.

As of 2023, India's main partners are the United States, China, the United Arab Emirates, Saudi
Arabia, Iraq, Hong Kong, and Singapore. India has been negotiating free trade agreements
(FTAs) with several partners – both bilateral and regional – over the past many years with a view
to promote India’s exports.

The direction recorded continuous growth with Asian countries and China between 2010-11 and
2021-22. Bilateral U.S.-India trade in goods and services jumped from $120.6 billion in 2020 to
$159.1 billion in 2021, signaling resilience in the commercial relationship between the United
States and India. The USA remained the top export destination, followed by United Arab
Emirates (UAE) and China.

India's exports to the Gulf Cooperation Council (GCC) countries have increased by 58.26 per
cent to about US $ 44 billion in 2021-22 against US $ 27.8 billion in 2020-21 (The Economic
Times June 06, 2022). The share of these six countries (Saudi Arabia, Bahrain, Kuwait, Oman,
Qatar and UAE) in India's total exports has risen to 10.4 per cent in 2021-22. Similarly, imports
rose by 85.8 per cent to US $ 110.73 billion compared to US $ 59.6 billion in 2020-21. The share
of GCC members in India's total imports rose to 18 per cent in 2021-22 (See Table 7 and 8).

21
Post-2014, a separate defence export strategy was prepared, broadly focusing on export
promotion or facilitation and export regulation. It is noteworthy that approximately half and one-
fourth of India’s defence exports between 2017 and 2021, were to Myanmar and Sri Lanka,
respectively. Other major regions to which Indian exports were headed were South-East Asia,
West Asia and Africa, with Indian military hardware exports comprising advanced light
helicopters, missiles, offshore patrol vessels, surveillance systems, personnel protective gear, and
various types of radars (Pant and Bhan, 2022).

Apart from the US and China, the other eight countries and regions among India’s top-10 trading
partners during 2021-22 were UAE, Saudi Arabia, Iraq, Singapore, Hong Kong, Indonesia, South
Korea, and Australia. The Netherlands and Brazil have jumped ahead from their previous
positions on India's list of export destinations in the FY 2022-23.

Trade with China: Amid fresh demands for snapping of trade ties with China it continues India’s
second biggest trading partner after the United States. However, Sharma (2022b) has highlighted
the fact that “while China and the US have both been India’s top trading partners in recent years,
there is a big difference between the trade with China and US. While with the US, India had a
trade surplus of $32.85 billion during 2021-22, with China, it had a trade deficit of $73.31
billion, the highest for any country. In fact, India’s trade deficit with China during 2021-2022
was double the previous year’s level ($44.02 billion) and it was an all-time high”. India’s trade
deficit with China is growing continuously since the beginning of 21st century.

India faces a dilemma in its trade with China. India has embarked atmanirbhar programme to
become self-reliant. The recent emerging trend from China’s imports to India has seen a marked
shift towards intermediate goods instead of goods for final consumption. The trend in import
from China is showing that 85 per cent of the goods imported are capital goods and intermediate
goods, while 15 per cent are consumption goods.

Table: 7 Top 10 Export Destinations of India in 2020-21 (Values in US$ billion)

Country 2019-20 2020-21 April-December 2021 Share% in 2021-22 *
USA 53.11 51.63 55.17 18.4
China 16.61 21.19 17.02 5.9

22
UAE 28.85 16.68 19.89 6.6
Hong Kong 10.97 10.16 8.43 2.8
Bangladesh 8.20 9.69 10.53 3.5
Singapore 8.92 8.68 8.23 2.8
UK 8.77 8.21 7.72 2.6
Germany 8.29 8.13 7.02 2.3
Nepal 7.16 6.84 6.66 2.34
Netherland 8.37 6.47 7.72 2.6
Source: Annual Report 2021-22 (Ministry of Commerce and Industry, Department of
Commerce, P-31)
*Economic Survey 2021-22

Table: 8 Top 10 Import Sources of India in 2020-21 (Values in US$ billion)

Country 2019-20 2020-21 April1December Share% in 2021-
2021 22*
China 65.26 65.21 67.66 15.5
USA 35.82 28.89 32.27 7.3
UAE 30.27 26.62 33.06 7.2
Switzerland 16.90 18.23 19.67 5.0
Saudi Arab 26.86 16.19 23.48 4.9
Hong Kong 16.94 15.17 13.79 4.7
Iraq 23.74 14.29 22.65 3.2
Germany 13.69 13.64 9.90 2.9
Singapore 14.75 13.30 13.29 2.9
Korea Rp 15.66 12.77 12.80 2.9
Source: Annual Report 2021-22 (Ministry of Commerce and Industry, Department of
Commerce, P-31)
*Economic Survey 2021-22

Directional change toward developing countries may be attributed to India’s involvement in

regional trading agreements particularly with developing countries, liberalization of economies

23
in Asia and Africa and impact of WTO commitments on trade policies of member countries.
With India focusing on its Look-East policy since 2009 and exploring new destinations, such as
Latin America, Africa and Oceania, growth in exports has, more or less, been steady, even as
demand from traditional markets of the US and the EU is on a decline. China continues to be the
largest exporter to India followed by USA, UAE and Saudi Arabia. There is need to diversify the
markets. India has seen a sharp spike in crude imported from Russia, is seen to be processing it
and exporting too, many countries, especially in Europe.

India has diversified its export destinations in last 25 years, yet more than 40 per cent of India’s
exports is still accounted by only seven countries. A further push would help provide the
institutional arrangements to, inter alia, and diversify both products and destinations (Economic
Survey, 2022).

Check Your Progress C

1. What do you mean by direction of trade?

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2. Name five major countries where India ships its exports.

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3. Why is there change in composition of imports? Write two reasons.

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4. Which goods are of significance in India’s import basket and name the suppliers of
these goods?

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4.6 MAJOR PROBLEMS AND CHALLENGES OF INDIA’S FOREIGN TRADE AND

POLICY
The continuing adverse geopolitical environment has brought mounting challenges for the
management of the external sector. The world has passed through the COVID 19 pandemic and
there have been repeated waves of infection, supply-chain disruptions and, global inflation. The
trade policy of India has undergone various changes from time to time and the major changes
involved simplification of processes and techniques, elimination of quantitative restrictions and
reduction in the tariff rates.

According to the WTO, India’s most-favoured-nation import tariffs are the highest among major
economies. The bigger challenge is the protectionism that is taking hold in India and rest of the
world. It is said that since 2014 India has raised tariff on 3,200 items. Though the average tariff
has dropped to 15 per cent in 2020, it is still considered to be amongst the highest in the world.
Higher tariff while protecting the domestic industry will also make exports uncompetitive where
the product has a good share of imported components. Take the case of mobile handset
manufacturing. In the case of non-zero tariff lines, India’s tariffs are higher than Thailand and
Vietnam for 85 per cent of the items. As Panagariya has remarked India cannot be an export
power house without being open on the import side (Madhavan, 2022).

In the contemporary environment, increasing trade barriers could be particularly damaging for
India as global firms are looking to diversify out of China. To improve the position on trade,
there is need to review how the currency is managed. Since currency adjustment is non-
discriminatory, it is a far better tool for managing the external account than selective import
controls (Business Standard Editorial Comment, 19 December, 2022).

As a net importer of oil and other commodities, India traditionally faces a balance of trade
problem whenever oil and commodity prices go up. The decade of 20s of 21st century is not
different. Despite India’s exports are doing well, but as imports are growing faster, widening of
the trade deficit is worrisome. An overall pessimistic global outlook on growth and related

25
worries are adding to the pressure. The RBI has also highlighted the increased vulnerability of
the external sector (Pal and Dutta, 2022).

The gap between imports and exports has widened, but that is to be expected in a growing
economy. India has a chronic problem of current account deficit (CAD), mainly owing to the
external factors and the deficit is growing. In a period of worsening CAD, a steady exodus of
foreign portfolio investments (FPIs) and a dwindling inflow of Private equity / venture capital
(PE/VC) funds pose a challenge for maintaining India’s overall external balance.

A wide range of companies from U.S. and other countries are active in the Indian market, across
most sectors. However, the Indian government has promoted the concept of “self-reliance”
(Atmanirbharta) also known as “make in India” as a means to develop and support India’s
businesses and employment. As part of its self-reliance movement, India has introduced market
access barriers in the form of tariffs, localization requirements, indigenous standards
requirements and labelling practices, price controls, and import restrictions. This approach of
Indian government is not being appreciated by companies from abroad. They feel that this is
making it more difficult for them to sell their goods and services in India. This is particularly true
for Indian government procurement when there are Indian-made options available. They are of
the view that foreign exporters are being pressured to start manufacturing their products locally
to retain market access, particularly if similar goods are not already produced in
India (International Trade Administration of US, 2022).

In this context, it is important to note that there is the absence of long-run causality from FDI to
export. This exists because of much domestic market orientation of foreign investors and less
emphasis on the export-oriented sectors in India (Jana et al, 2020).

The stimulus and supply-chain disruptions due to the pandemic started pushing the inflation up
which has been further accentuated by the Russian invasion of Ukraine. Most economies are
tightening their monetary policy and raising interest rates in a bid to tame the run-away prices.
These developments are slowing the global trade and economic growth (Madhavan, 2022).
According to WTO data, volume of merchandise exports rose by 9.8 per cent across the world in
2022 but in terms of value, it was much higher at 26 per cent. This reflects the impact of inflation
adding to value of world trade once the commodity prices cool, export value too will reduce.

26
As regards services exports, India has the potential to grow it many times. What is needed is a
clear vision to leverage India’s IT capabilities in areas such as consultancy, accountancy, legal
and healthcare. To effectively break away from the past, there is a need to get on a mission mode
and remove all impediments without falling prey to various domestic interest groups (Madhavan,
2022).

The objective behind creating Special Economic Zone (SEZs) was to attract foreign direct
investments, develop infrastructure, facilitate access to global markets for domestic companies,
and encourage exports. After the initial momentum, the SEZ framework lost steam leaving a
yawning gap between the initial promise and actual delivery (Barad and Singhania, 2022).

The latest trend in de-globalisation comes at a cost by preferring friendly economies for supply
of inputs over the most efficient ones. Integrating logistics chains across economies involves
another set of challenges. Economic engagement has been a significant cause of changes in
geopolitical power equations. Reducing this inter-connection is no guarantee new polarities will
not emerge. In the bargain, the economic outcome is suboptimal. Competitive advantage derives
from a host of factors that cannot be overridden by political considerations (The Economic Times
Bureau, 17 September, 2022).

The rupee will keep trending down as capital flows seek refuge in advanced economy debt. A
policy push at this juncture could be a workaround for a controlled currency depreciation (The
Economic Times Bureau, 04 September, 2022). In fact, India being the net-commodity importing
country and having current account deficit, implying that India’s forex reserves are structurally
different from other countries as it is made up entirely of liabilities, namely the foreign capital
inflows. This makes India’s forex reserves more vulnerable to the threat of a sudden exodus of
foreign capital (Pal and Dutta, 2022).

The main problem is that India has mostly missed out on embedding itself in global supply
chains as underlined in Amita Batra’s book on India’s Trade Policy in the 21st Century. Also
important is the fact of fragmented nature and small size of India’s exporters along with their
thinking which is not so global.

To face a huge decline in export business from the US, the world’s largest economy, may be
regarded as misfortune (Jacob, 2022). Many Indian products fail quality tests due to traces of
27
pesticides, pathogens, illegal dyes, etc. India needed to redesign its quality assurance framework
to help firms reach higher standards and protect the country from substandard imports
(Srivastava, 2022). Labour and environment standards are issues that the country has always
insisted should be dealt with on their own merits at dedicated forums, such as the ILO, and not at
platforms deliberating trade issues (Business Line Opinion, 27 September, 2022).

The production-linked incentive (PLI) scheme is a revealing illustration of the problems of

having an incoherent approach to foreign trade. It is not very clear if the PLI scheme is meant as
a temporary bridging mechanism, an export promotion system, an investment promotion scheme,
or a geo-strategic plan to reduce dependence on China. What is certain is that such schemes,
unless their aim and purpose is clearly defined, tend to expand in scope in response to rent-
seeking. The expansion of the scheme will also have fiscal implications. These issues need to be
clearly examined and understood going forward (Business Standard Editorial Comment, 28
September, 2022).

With advanced economies staring at recession, India’s commodity-focused merchandise exports

are vulnerable both to a squeeze in realisations and drying up of demand. Imports, on the other
hand, are seeing a strong resurgence on the back of the economic revival post-Covid. There is a
question mark whether inward remittances will remain if the US and UK slip into recession.
Buoyant software exports have helped bridge the merchandise deficit so far, but this is again
contingent on clients of IT companies in North America and EU retaining their budgets amid
recession (Business Line Opinion, 07 October, 2022).

While India appears to be seeking self-reliance, it is eager to ensure an adequate supply of raw
materials and goods required in strategic sectors. India’s external financing situation is likely to
remain stressed in years ahead, especially if the recent export slump continues. Normalisation of
post covid-19 pandemic has spurred a renewed demand for imported inputs. India’s imports have
soared just at a time when its merchandise exports have started to fall. India’s merchandise
exports have been structurally weak, stagnating for the past decade. Foreign demand will slow
further as advanced countries slip into recessions. In that case, India’s CAD could widen even
further.

28
Puri (2017) has also stressed that “India faces significant challenges in the area of trade policy—
the global economic slowdown, increasing protectionism, the stalled mega-trade deals that could
in time be revived, and perhaps more important, its own domestic preoccupations”. While the
global economic scenario is crucial, the domestic factors are no less important, when it comes to
trade. India’s overall trade policy faces certain challenges viz:

(i) inadequate export diversification in terms of products and geographical

distribution;
(ii) insignificant involvement of a majority of states in exports;
(iii) rationalisation of the tariff regime and export promotion schemes; and
(iv) factor market reforms which are critically linked with export performance.

To sum up this section, these challenges not only affect the productivity and competitiveness of
domestic firms but also restrict them from participating in global production networks. The
challenges and policy options on the trade front for India are many. Some are due to the current
emerging global situation and some are systemic and long term in nature (Prasad, 2012). Macro
policies pose long term challenges. Micro issues are specific to sectors and are largely of short
term nature. Some of the micro challenges are as under:

(i) Infrastructure related

(ii) Trade facilitation measures
(iii) Tax and customs duty related
(iv) Credit related
(v) Other issues: These include tapping the domestic market for software; lowering and
streamlining the different port charges; promoting FDI in export sector; addressing the
skill mismatch which has contributed to the Indian industry and exports becoming less
competitive.

These impediments in the way of better export performance are being faced by India’s exports
which need to be addressed. A more comprehensive and consistent trade policy needs to be
evolved. Contradictions between the PLI and export taxes be removed. Policymakers should
acknowledge the importance of reliable streams of imports in order to grow exports in an age of
global value chains. This might also lead to more attention to the building of the ecosystem of

29
smaller producers and frictionless trade that such deals need to be successful over time (Sharma,
2022a).

4.7 THRUST AREAS OF FOREIGN TRADE

Liberalisation and rule based economic relations will define India´s trade in years ahead
(Editorial Comment Business Standard, November 24, 2022). Looking ahead, Acharya (2022)
has suggested that the broad priorities for India’s trade policy should be:

(i) Phase out the tariff increases that have occurred since 2017. As the Russian born,
British-American economist, Abba Lerner, stated in his famous “symmetry
theorem” of 1936, “a tax on imports amounts to a tax on exports”.
(ii) In dealing with external payments pressures, exchange rate depreciation should
be the prime instrument, not tariffs or quota restrictions on imports.

(iii) In dealing with inflation, monetary and fiscal measures are preferable to export
bans and duties, which sometimes pave the way to balance of payments
problems.

Expectations are rising about a set of trade facilitation measures to get around the adverse
external environment. In this context, Majumdar (2022) has pointed out that “Indian industry
will also have to adapt to the new trade ecosystem. Adapting to the changing nature of cross-
border transactions, identifying the right market, managing real-time inventories, increasing
online presence, and tapping into customer preferences will require Indian businesses to unlearn
old methods and learn new techniques of doing trade”.

India needs to build institutional capacity in the trade policy establishment. This will not only
help present India’s position more effectively in trade negotiations but also inform the broader
domestic policy establishment to take a more practical position on foreign trade. To boost trade
in a sustainable manner, it is now important to integrate with GVCs (Business Standard Editorial
Comment, August 08, 2022).

Recent improvements in India's export performance have come about through a better mapping
of Indian districts with foreign markets. Policymaking at the state level encourages
entrepreneurship and migration. Indian states must align syllabi to enable its labour force to find

30
employment opportunities as machines take over unskilled jobs (The Economic Times Bureau,
August 08, 2022).

Selecting the right districts to promote them as export hubs is paramount. India merely ranks 21st
amongst its global peers. This relatively smaller size of Indian export is not commensurate with
its GDP, which stands as the fifth largest in the world. Out of the 36 (28 States and 8 Union
Territories), the top ten States account for 85.3 per cent of India’s overall exports. The significant
contribution comes from the top five States — Gujarat, Maharashtra, Tamil Nadu, Karnataka and
Uttar Pradesh. Unsurprisingly, except for Uttar Pradesh, four out of the top five largest exporters
are States located in the South and West of the country that benefits from coastal access. Most
surprisingly, 82 districts do not engage in any exports at all. The majority of exports concentrate
on non-manufactured goods (Kumar and Ikeda, 2022).

In order to expand market overseas for domestic products, it is imperative to not only ease
supply-side bottlenecks but also undertake reforms that facilitate a process of structural
transformation from producing “poor-country goods” to “rich-country goods” by enhancing the
efficiency and competitiveness of domestic industry (Jain, et al, 2022). India should overcome
the constraints of trade such as:

(i) remove bottlenecks operating in the economy,

(ii) electricity shortages,
(iii) inadequate transportation infrastructure,
(iv) proper diversification in composition of goods and services,
(v) while making diversification in the composition of the price and income
elasticity for demand for export, should be kept in mind,
(vi) help in improving export competitiveness,
(vii) utilize trade as an effective engine for accelerating the pace of inclusive
development in the country.

Sengupta (2022) has suggested that “policy needs to become significantly more export-oriented
and less protectionist”. The need of the hour is four-fold:
(i) Allow the rupee to depreciate,

31
 (ii) Encourage foreign firms to produce in India by letting them access their supply
chains,
(iii) Encourage domestic firms to step up to the competition, and
(iv) Create a level playing field for all players.

By adopting this strategy, India could potentially be able to reduce its large CAD. There exists a
wide gap in India’s exports potential and actual exports in many sectors, especially
pharmaceuticals, gems and jewellery and chemicals. To maximize opportunities within this
environment, India needs a positive trade policy agenda. This is the only viable way for India to
enhance its economic relationship with major trading partners (Puri, 2017).

Containing imports will not help. A better way to narrow the trade deficit would be to focus on
increasing exports, especially to fill the gap left by falling Chinese exports, by incentivising
companies to manufacture for overseas market. The PLI scheme can be expanded and exporters
need to be nudged to move up the value chain (Editorial Comment the Hindu Business Line,
December 06, 2022).

Greater openness to imports at lower tariff and non-tariff restrictions and FDI can not only boost
exports but also enhance the capacity to absorb foreign capital (Jain, et al, 2022). The
Government must accept the nature of global trade and adapt accordingly. To push exports,
Indian firms will need to get into global value chains, which is not possible at the scale required
in a high-tariff economy (Business Standard Editorial Comment, 19 December, 2022).

The new-age FTAs signed look at trade more holistically which reflects the changing paradigm
of international economic relations. Trade in services, e-commerce, labour, climate/environment,
digital trade, public procurement, supply chains, gender, etc., all find a place. For India to
achieve its policy objectives, the government and industry, particularly the manufacturing sector,
must prepare for opportunities and greater engagement in an evolving multilateral trade arena.
India’s priorities should include taking policy measures to conform to global standards and
supporting the World Trade Organization (WTO) to relaunch multilateral negotiations” (Puri,
2017).

32
In sum, the main objective of an enabling policy framework should be to achieve the much
needed global competitiveness in India’s manufacturing and services. To achieve a respectable
share in world exports, there is need to have a change in trade strategies and policy along with
specific measures. As such, the thrust areas for promoting exports should be on the following
lines (Gupta, 2019):
(i) Demand based export basket diversification rather than a mere supply based
strategy.
(ii) Rationalization of tariffs structure. Though different rates of tariffs are levied for
various reasons, there is scope for reducing average applied tariffs by selectively
reducing tariffs across many lines, while retaining higher tariffs for sensitive and
important items. Consequently WTO bound tariffs could also be reduced which
can help India to take a more pro-active role in WTO and bilateral negotiations.
(i) Streamlining export promotion schemes.
(ii) Developing world class export infrastructure and logistics especially
port-related.
(iii) Having useful FTAs/CECA’s with some major countries while
actively expanding engagement with BRICS and ASEAN where India
enjoys competitive advantage. FTAs are meant to be about give and
take.
(iv) Greater States’ participation in exports.
(v) Formulating a well-defined Agri Trade Policy.
(vi) Moving from assembling to building a robust manufacturing base with
a well settled value chain.
Right now, India has no option but to find the resources to produce and import enough fuels to
keep the wheels of the economy running as fast as possible.

Check Your Progress D

1. Write four challenges are there in India’s foreign trade?

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2. Write five major challenges being faced by foreign trade.

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3. Identify five thrust areas for export promotion.

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4. Identify five thrust areas of India’s exports.

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4.8 LET US SUM UP

Foreign trade plays an important and crucial role in the development of Indian economy. India’s
total trade (export + imports) increased consistently during pre and post reform of 1991. The rate
of increase in trade was slower in the pre reform period as compared to post reform which
registered a higher rate. The growth rate of imports was higher than the growth rate of export.

The composition of India's foreign trade has undergone substantial changes. India’s major
exports now includes manufacturing goods such as engineering goods, petroleum products,
chemicals and allied products, gems and jewelleries, textiles, electronic goods, etc. which
constitute over 80 per cent of India’s export basket. It is a remarkable achievement that India has
transformed itself from a predominantly primary goods exporting country into a non-primary
goods exporting country. Under imports too India’s dependence on food grains has declined.

34
Major import items constitute capital goods and intermediates, which not only support the
manufacturing sector but also supplies raw-materials for the export oriented units.

Since 1991, the government introduced some changes in its policy on trade, foreign Investment,
tariffs and taxes. Exports have continued to be the major focus of India's foreign trade policy. By
exploiting the provisions of GATS, now India is becoming the largest exporter of services.

The balance of trade is becoming unfavorable for India during the post reform period. It would
be necessary to add new commodities and services at competitive price in the export basket.
India’s services trade surplus has increased due to the surge in IT exports. For this, India needs a
comprehensive trade policy measure and integrated efforts.

Over the years, India's direction of trade has gone substantial change with countries of Asia
including ASEAN and Africa. The share of OECD countries, except North America, in India’s
overall export earnings declined continuously post reform. Developing countries and OPEC both
emerged as the potential markets for Indian exports with their increasing shares. The share of
Africa and Asian developing countries showed an upward trend and these countries have
emerged as good markets for Indian exports.

Though the volume and value of exports has increased manifold, India’s share in the world
exports is still not up-to the expectation. The impact of the Russia-Ukraine war and related
sanctions on supply chains and disruption of trade routes can adversely affect India’s exports.

4.9 KEY WORDS

• Ad-hocism: A policy or method characterized by actions or decisions for dealing with

problems or resolving issues chosen to suit or fulfill immediate needs or goals.

• China+1: It is a global business strategy and the term was coined way back in 2013.
China-Plus-One, or just Plus One refers to a strategy in which companies avoid investing
only in China and diversify their businesses to alternative destinations. India must

35
 reorient its trade policy to take advantage of the increasingly popular China-plus-one
strategy.

• World Integrated Trade Solution (WITS): WITS is a software which is designed to

integrate several trade-related databases, retrieves information on world trade and tariffs
providing easy access. The World Bank — in collaboration with the United Nations
Conference on Trade and Development (UNCTAD) and in consultation with
organizations such as International Trade Center, United Nations Statistical Division
(UNSD) and the World Trade Organization (WTO) — developed the World Integrated
Trade Solution (WITS). Four major databases are currently accessible through WITS:
(i) TRAINS (UNCTAD)

(ii) COMTRADE (UN Statistics Division)

(iii) Integrated Database (IDB-WTO)

(iv) Consolidated Tariff Schedule (CTSWTO)

4.10 TERMINAL QUESTIONS

1. Point out the importance of foreign trade in Indian economy.
2. Describe the broad trends in India’s foreign trade since 1991.
3. Explain changes in the composition of India’s exports. Also indicate areas of
weaknesses in export trade.
4. Discuss the structural changes in India’s import basket in the post reform period. Is
it possible to ban import items name them?
5. What important changes have taken place in pattern of direction of exports?
Explain them.
6. Which countries are important for India’s imports and why?
7. What is the composition of services export? Explain their importance.
8. “Services exports are rising faster than merchandise exports” give reasons for this.
9. Analyse the challenges being faced by India’s foreign trade. What remedies will
you suggest to overcome them?

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 10. Examine the thrust areas for India’s foreign trade. How will you manage these for
strengthening India’s exports?

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