UNIT: 6 Foreign trade refers to the trade between two or more countries. It is the exchange of goods or services and capital across international borders. A trade between India and U.S.A. or U.K. will be termed as foreign trade/international trade. Foreign trade can take place on a bilateral, regional, or global level. Foreign trade can be divided into three categories: a) Export Trade: When goods are sold to the foreign countries, it is called as Export Trade. b) Import Trade: When goods are purchased from the other countries, it is known as Import Trade. c) Entrepot Trade: When goods are purchased from a foreign country and are sold to some other country, it is called as Entrepot trade. Importance of Foreign Trade: 1. Economic Growth: Foreign trade fosters economic growth by providing access to a larger market for goods and services. This leads to increased production and employment opportunities. 2. Resource Utilization: Countries can specialize in producing goods and services that they have a comparative advantage in, leading to efficient resource allocation and higher productivity. 3. Consumer Welfare: Foreign trade allows consumers to access a wider variety of goods and services at competitive prices, improving their standard of living. 4. Foreign Exchange Earnings: Exporting goods and services generates foreign exchange earnings for a country, which can be used to pay for imports, service debt, and invest in development projects. 5. Technological Transfer: International trade facilitates the transfer of technology and know-how between countries, leading to innovation and technological advancement. India’s Foreign Trade: Composition and Direction Composition of Trade and Direction of Trade Composition of trade means a study of the goods and services of imports and exports of a country. In other words, it talks about the commodities of imports and the commodities of exports of a country. Therefore, it indicates the structure and level of economic development of a country. Developing countries export raw materials, agricultural products and intermediate goods; developed countries export finished goods, machines, equipment and technique. Direction of trade means a study of the countries to whom the exports are made and from whom the imports are made.
According to the Economic Survey 2022-23, India’s top five export
destinations include the USA, UAE, China, Bangladesh, and Hong Kong. In terms of imports, the top five destinations are China, the United States of America, the UAE, Switzerland, and Saudi Arabia. India has maintained a positive trade balance with the US, ranking among its top trading partners.
India’s Foreign Trade Position
▪ India’s engagement in foreign trade witnessed a continuous decline until 1980. However, since 2001, there has been a consistent improvement. ▪ As per the WTO ranking in 2021, India’s share of merchandise imports and exports among developing countries to the rest of the world slipped to the fourth and eighth positions in 2020. ▪ In 2019, India accounted for approximately 1.71% of the total global merchandise exports. ▪ Conversely, the top five countries contributing to India’s surplus trade balance are the USA, Bangladesh, Nepal, Turkey, and the Netherlands. India faced its largest trade deficit with China at -43.4, while its exports reached 422.0 billion in the fiscal year 2022. India Foreign Trade Status ▪ As of 2021, India ranked 14th in total exports and 11th in total imports, according to the Economic Complexity Index. ▪ Despite its foreign reserves surpassing US$ 600 billion in 2023, the improvement in the Balance of Payments was confined to the current account deficit. ▪ The RBI reported a current account deficit of 2.7% of GDP from April- December 2022, compared to 1.1% in the same period the previous year. Direction of India’s Foreign Trade ▪ India’s foreign trade direction has shifted over the years, with America emerging as the largest trading partner. Regionally, Asia-Oceania countries dominate India’s foreign trade, and the European Union stands as the largest trading partner group, followed by ASEAN. ▪ The major importers for India include China (15.5%), UAE (7.3%), USA (7.2%), Saudi Arabia (5.0%), and Iraq (4.994%). On the export side, the top countries are the USA (18.4%), UAE (6.6%), China (5.9%), Bangladesh (3.5%), and Hong Kong (2.85%). Structure of Indian Foreign Trades The following is a systematic discussion of India’s import-export Indian Exports ▪ Despite challenges in tourism, India’s net income from services grew significantly in April-December 2021, driven by robust software and business income. In the fiscal year 2021-22, India’s overall exports (Merchandise and Services) are estimated at USD 676.5 billion, with merchandise contributing USD 422 billion and service exports USD 254.5 billion. Overall imports for the same period are estimated to be USD 495.83 billion. ▪ The structure of Indian foreign trade involves a systematic discussion of both imports and exports. Exportation involves providing goods or services from domestic producers to foreign consumers. While traditional exports required customs involvement, the rise of small trades through platforms like Amazon and eBay has reduced such bureaucratic hurdles, although legal restrictions still apply. Top Export Destinations (2021-22 in % Share)
Country % Share
United Arab Emirates 18.4
China 5.9
Bangladesh 3.5
Hong Kong 2.8
Singapore 2.8
UK 2.6
Netherlands 2.6
Belgium 2.4
Germany 2.3
Indian Imports ▪ Imports refer to any goods or services legally brought into one country from another, typically for trade purposes. Imported goods or services are provided to domestic consumers by foreign producers. ▪ In the receiving country, an import is considered an export to the sending country. The import process usually involves customs authorities in both the importing and exporting countries and is often subject to import quotas, tariffs, and trade agreements. ▪ In India, import data is reported by the Directorate General of Commerce. Among the significant imports, the value of Petroleum, Oil, and Lubricants (POL) saw growth in the financial year 2019-20. ▪ For the period FY 2022-23 (April-March), India’s merchandise imports totaled US $714.24 billion, compared to $613.05 billion during FY 2021-22 (April-March). ▪ A report from the UK’s Department of International Trade, released in September 2021, projects that India is poised to become the world’s third- largest importer by 2050. Top Import Destinations (2021-22 in % Share)
Country Percentage Share
China 15.5%
United Arab Emirates 7.3%
United States 7.2%
Saudi Arabia 5.0%
Iraq 4.9%
Switzerland 4.7% Hong Kong 3.2%
South Korea 2.9%
Indonesia 2.9%
Singapore 2.9%
Trade Composition The composition of trade is outlined below: Export Composition ▪ The commodity composition of India’s trade has undergone significant changes since liberalization, influenced by trade policy, movements in national prices, and the evolving pattern of domestic demand. ▪ India’s overall exports (merchandise and services combined) for April- February 2021-22 are estimated at US $601.77 billion, showing a positive growth of 36.19% over the same period last year and a positive growth of 23.44% from April-February 2019-20. ▪ According to the International Monetary Fund’s World Economic Outlook Database, India’s Total Gross Domestic Product amounted to US $8.221 trillion as of October 2016. Therefore, exports accounted for approximately 3% of the total Indian economic output. ▪ The top 10 export product categories for the financial year 2021-22, according to the Department of Commerce, Government of India, are as follows: ▪ Petroleum products: 14.3% ▪ Pearl, precious, semi-precious stones: 6.8% ▪ Drug formulations, biologicals: 4.7% ▪ Gold and other precious metal jewelry: 2.8% ▪ Iron and steel: 6.0% ▪ Organic chemicals: 2.8% ▪ Electric machines and equipment: 2.4% ▪ Aluminum products: 2.3% ▪ Products of iron-steel: 2.0% ▪ Marine products: 2.0% Import Composition ▪ Overall imports for April-February 2021-22 are estimated to be US $683.01 billion, reflecting a positive growth of 51.51% over the same period. The value of non-petroleum imports was US $44.07 billion in August 2022, showing a positive growth of 23.63% over non-petroleum imports of US $35.65 billion in August 2021. ▪ India’s top 10 imports accounted for almost three-quarters (74.3%) of the overall value of its product purchases from other countries. The highest dollar-value product groups in India’s import purchases during 2021-22 are as follows: ▪ Petroleum crude: 19.2% ▪ Gold: 8.8% ▪ Petroleum products: 6.3% ▪ Coal, coke, and briquettes, etc.: 4.9% ▪ Pearl, precious, semi-precious stones: 5.0% ▪ Electronics components 3.8% ▪ Vegetable oil 3.2% ▪ Organic chemicals 2.9% ▪ Computer hardware 2.6% ▪ Plastic raw materials 2.5% Overall Trade Balance ▪ India experienced a current account deficit in H1 (first half of the financial year) FY 22 due to a widening trade deficit, driven by a broad-based revival of aggregate demand. Despite the Current Account Deficit (CAD), robust capital flows resulted in an overall Balance of Payments (BoP) surplus of US$ 63.1 billion in H1: FY 22. ▪ The trade deficit for FY 2022-23 (April-March) was estimated at $ 266.78 billion compared to $191.05 billion during FY 2021-22, leading to augmented foreign exchange reserves of US$ 596 billion as of June 2023. India consistently ran a trade surplus with its top trading countries, the USA and the United Arab Emirates, since 2014-15. ▪ However, trade deficits persisted with other major trading partners such as China PRP, Saudi Arabia, Iraq, Germany, Korea RP, Indonesia, and Switzerland from 2014-15. India had a trade surplus with Hong Kong and Singapore until 2017-18, shifting to a trade deficit in 2018-19. Bilateral imbalances have generally remained stable.
Balance of Payment It is a systematic pattern to record all trade and capital inflows and outflows from a country in the balance of payment statement. Thus, the balance of payment (BOP) is a systematic record of a country’s all economic transactions with the rest of the world during a given period of time. “The balance of payment of a country is a payment of a country is a systematic record of all economic transactions completed between its resident and the resident of the world during a given period of time, usually a year.” Balance of Payment = Exported visible and invisible items - Imported visible and invisible items. Causes of Unfavorable Balance of Payment: 1. More demand of consumption goods: When demand for consumption goods increases like when population increases or production decreases, the balance of payment becomes disequilibrium. 2. Price Disequilibrium: Due to inflation and backward technology domestic prices have increased more than the increase in prices of foreign goods. This has led to an increase in import and decrease in exports. So, this causes price disequilibrium. 3. Foreign Competition: When countries shift from the goods imported from one country to different countries due different reasons like price, quality etc. Then also exports of one country decrease due to foreign competition. 4. Less growth in exports: Despite various export promotion schemes, our exports are still less than our imports. Moreover, the growth rate of exports is less than the growth rate of imports. 5. Population explosion: Rapid growth of population in countries like India increases imports and decreases the capacity for exports. Moreover, whatever is produced extra for export purposes, the same is consumed within the country. This leads to an adverse BOP position. Measures to correct disequilibrium in the Balance of Payments: 1. Promotion of Exports: Promotion of export is the best measure to correct an adverse balance of payments. For this all taxes on export goods be withdrawn, export industries should be provided new materials and transport facilities at reduced prices, so that prices of these goods remain low. 2. Increase in Production: Increase in production will lead to excess of final goods so a country can export the excess of final goods to different countries. 3. Trade Agreement: More trade agreements should be done with foreign countries to promote our foreign trade and exports. 4. Encouragement of foreign investment: Foreign industries and MNCs are encouraged to invest their capital in India. Special facilities are provided to attract foreign capital. It leads to an inflow of foreign capital. 5. Attraction to foreign tourists: The government should spend a lot of money to develop picnic spots and resorts in different parts of the country. A large amount of foreign exchange can be earned from foreign tourists. 6. Devaluation of Indian Currency: Lowering the value of the domestic currency in terms of foreign currency in terms of foreign currency in terms of foreign currencies is called devolution. The exchange rate of the currency may be reduced by the government. Foreign goods will become costly and local goods will become cheap. Imports will be cut down and exports will be pushed up.
India’s BOP: Current Scenario
Evolution of India’s BoP: Post-independence, India’s pursuit of economic self-
sufficiency resulted in BoP deficits. The 1991 liberalization and reforms marked a shift towards openness, fostering BoP resilience. Recent trends underscore robustness driven by a thriving services sector and stable foreign exchange reserves.
BoP Crises Faced by India: Various crises, including the 1979 Oil Crisis, the 1991 BoP Crisis, the Global Financial Crisis (2008), and the COVID-19 Pandemic, tested India’s BoP. Prudent policies and economic reforms mitigated these challenges. • According to the RBI, the Current Account Deficit (CAD) for the first half of 2022-23 stood at 3.3% of GDP. • It is expected to moderate in the second half of 2022-23 and remain eminently manageable within the parameters of viability. • In January 2023, trade deficit narrowed to $17.7 billion, led by a sharp fall in non-oil imports. Also, o FPI outflows have come down o Workers’ remittances went up o Gold imports have declined
How will moderating CAD impact the market?
• The reduction in CAD due to services exports, is a positive sign.
• The rising CAD raises concerns among investors as it hurts the currency and thereby the inflow of funds into the markets. • The value of an economy depends a lot on the value of its currency and thereby, it also supports the equity markets by keeping the fund flow intact. Present Vulnerabilities and Mitigation Measures: Vulnerabilities: 1. Trade Deficit: Issue: Persistent trade deficit, particularly in oil and electronics, impacting the current account balance. Mitigation: Promote export diversification, focus on high-value exports, and negotiate trade agreements to enhance market access. 2. Dependence on Remittances: Issue: Reliance on remittances as a significant source in the current account. Mitigation: Diversify income sources, boost domestic job creation, and provide incentives for investments in sectors with high remittance potential. 3. Global Economic Uncertainties: Issue: External shocks and uncertainties impacting global trade. Mitigation: Strengthen foreign exchange reserves, monitor global economic trends, and diversify trading partners to reduce dependence on specific regions. 4. Volatility in Capital Flows: Issue: Fluctuations in capital flows, impacting the capital account. Mitigation: Implement policies to attract stable long- term investments, manage short-term capital flows effectively, and strengthen regulatory frameworks. 5. Rising Current Account Deficit (CAD): Issue: Growing CAD due to increased imports and reduced surplus in services trade. Mitigation: Focus on enhancing services exports, especially in areas like IT and software, and rationalize import policies to manage trade imbalances. 6. External Debt Levels: Issue: The potential risk of rising external debt levels. Mitigation: Prudent external debt management, refinancing at favorable terms, and ensuring debt sustainability by balancing concessional and non-concessional borrowing. 7. Fluctuating Oil Prices: Issue: India’s vulnerability to oil price fluctuations impacting the import bill. Mitigation: Invest in renewable energy sources, enhance domestic production, and engage in strategic oil stockpiling to mitigate the impact of oil price volatility Mitigation Measures: 1. Diversification of Exports: Action: Promote non-traditional exports, focus on high-value sectors, and explore new markets. Benefits: Reduces dependency on specific products and markets, enhancing overall export resilience. 2. Enhanced Foreign Exchange Reserves: Action: Actively manage and augment foreign exchange reserves. Benefits: Provides a buffer against external shocks, ensuring stability in the face of adverse global economic conditions. 3. Investment in Domestic Industries: Action: Encourage investments in key sectors to reduce import dependency. Benefits: Boosts domestic production, mitigates trade imbalances, and strengthens the overall resilience of the economy. 4. Policy Measures to Attract FDI: Action: Implement policies to attract stable and long-term foreign direct investment. Benefits: Provides a stable source of capital, supporting economic growth and reducing vulnerability to short- term capital fluctuations. 5. Diversification of Trading Partners: Action: Actively seek and strengthen trade ties with a diverse set of countries. Benefits: Reduces dependence on specific regions, providing more stability in the face of regional economic uncertainties. 6. Technology and Innovation Adoption: Action: Embrace technological advancements and innovations to enhance productivity and competitiveness. Benefits: Positions India as a technologically advanced player, attracting investments and boosting exports. Conclusion: India must prioritize export diversification, attract stable investments, and embrace technological innovation to navigate global uncertainties successfully. Continuous monitoring, adaptive policies, and fostering a dynamic economic landscape are crucial for sustained BoP stability and growth.
