INDIA’S FOREIGN TRADE
Export and Import of goods and services across/ with different countries is called foreign or international trade.
Observations under International Trade
1. It’s based on International specialization and on principle of comparative cost advantage.
2. Facilitates the exports of goods at higher prices compared with domestic prices to the rest of the world.
3. Increases investment opportunities for trading partners by providing a wider market size. Serves as an engine of growth as a higher investment means higher GDP growth.
India’s Foreign Trade at the time of Independence:
1.India became a source of raw material and a market for the finished goods from Britain.
2. Direction of trade was largely restricted to Britain
3.Trade composition directed the backwardness of economy.
India’s Foreign Trade after Independence
Volume of Foreign Trade: refers to the value f exports and imports in a country.
1. Rise in the percentage of exports and imports are a result of ‘base effect’. A small increase seemed significant due to the fact that initially, it was extremely low.
2.India’s share in global trade had declined despite India’s foreign trade had risen.
3. Only after the initiation of economic reforms the volume became significant.
Composition of Foreign Trade:
Refers to the items that compose the export and imports.
1. The decline in Percentage Share of Agricultural Exports:
- To meet the demands of increasing consumption of farm products by growing population India showed a significant decline in agricultural exports.
- Farm products were started to be used as raw materials for the domestic industry.
2. Decline in Percentage Share of Conventional Items:
- The demand for conventional items of exports like tea, jute, etc started having rise in domestic demand which previously formed the bulk of India’s exports, therefore their exports tended to fall.
3. Increased in percentage share of Manufactured Goods:
1. Gems and jewellery are now in the list of highest exporting goods. This is a result of Planned Development Programmes launched after independence.
- There was a structural transformation as the predominance of the primary sector was now replaced by the secondary and tertiary sectors. Therefore, no longer backward economy.
Direction of Foreign Trade:
1. The direction of Foreign Trade took significant change as now list of trading partners has expanded over time which was largely restricted to Britain pre-independence. China, UAE, Australia, Iran, etc became the major trading partners.
2. As a result of Globalization and free trade, Chinese goods started dominating the Indian markets more than Indian goods in Chinese markets. China succeeded d India in earning the gains of trade.
1991; Year of the great divide as India relied on ‘Inward Looking Trade Strategy ‘’ till 1990 that failed to give enough and targeted gains. After 1991 India shifter to the strategy of export promotion which accelerated the rise in exports and imports of the country.
INWARD LOOKING TRADE STRATEGY
( Import Substitution Strategy )
Meant domestic production of goods that economy had to import from the rest of the world. This was followed in order to save foreign exchange by restricting import volume.
1. Scarce foreign exchange had to be used for import of machinery that was essential for growth and development as it couldn’t be produced domestically due to lack of technology and investment funds.
2. Government wanted to economize use of foreign exchange.
3. This was also done to protect the domestic industry from international competition.
Impact of Inward Looking Trade Strategy:
Good Impact
1. High rate of Industrial Growth with Structural Transformation:
Contribution of industrial sector to the GDP increased despite Green Revolution which was the indicator of economic growth based on structural transformation in an economy.
2. Diversification of Industrial Growth:
- The industry started to expand across engineering goods and a wide range of consumer goods and not just textile.
- Growth in the sunrise industry like electronic industry and Growth of the automobile industry was also observed
3. Opportunities of Investment:
- New opportunities for those who had less capital opened by the protection of Small scale industry.
- Use of resources that remained idle was observed.
- Opportunities of self-employment opened promoting growth and equity as a result of new investments.
Bad Impact
1. Growth of Inefficient Public Monopolies:
- Inefficient public monopolies started growing as a result of the protection of the public sector industry.
2. Lack of Competition implied Lack of Modernization:
- Domestic producers lacked the inducement to upgrade and modernize their products because of lack of competition.
3. The indiscriminate spread of Public Sector Enterprises:
- These public sector enterprises started swallowing up all the opportunities of private entrepreneurs and were spreading indiscriminately.
4. Economically Unviable State Enterprises; a Compulsion:
- Despite being incapable of working successfully the public sector or state enterprises continued operating on political compulsion and trade union on the pretext of social injustice and unemployment. Private unviable enterprises were shut if seen economically unviable.
NEW ECONOMIC POLICY
The economic reforms started by the Government of India in 1991 to end economic crisis of 1990s came to be known as New Economic Policy.
Three major components of NEP are Liberalization, Privatization and Globalization, commonly called LPG.
Need for NEP:
1. High Fiscal Deficit: Borrowings of government on account of the excess of its expenditure over revenue during a year is called fiscal deficit.
It shows poor financial status, triggers inflation and lowers faith of international institutions (like World Bank) in the country. The government was in debt trap from 1990 to 1991.
2. Balance of Payment Crisis: relates to BOP deficit which is a difference between total receipts and total payments of a country on an account of economic transitions with the world. End of 1990 marked the high borrowings and building CAD. NEP was the only way out.
3. Falling Foreign Exchange Reserves: India’s forex reserves fell so low that it could not afford to pay for an import bill of even ten days. Country’s gold reserves had to be mortgaged by the government with the World Bank. Need for NEP was immediate and essential.
4. Inflationary Spiral: Inflation shot up as a result of an increase in the supply of money as a result of borrowings by govt to cope with the fiscal deficit.
5. Poor Performance of PSU’S: Huge amount of money was invested in the growth of PSU’S that turned out to be inefficient and corrupted resulting in huge losses. NEP was required to reverse the damage done by them.
ELEMENTS OF NEP (NEW ECONOMIC POLICY)
1. Liberalization: means freedom of producing units from the direct or physical controls imposed by governments. The controls included:
- Industrial Licensing, Price control or financial control on goods, import license, forex control, investment restrictions by big houses. These controls resulted in corruption, undue delay, and inefficiency.
- Greater reliance, therefore, was placed on market forces of supply and demand rather than checks and controls.
2. PRIVATISATION: involving private sector ownership operation of state-owned enterprise.
- Sale of government enterprises to private entrepreneurs.
Need for Privatization: Public Sector Enterprises became dead weights that were incurring huge losses. Corruption and inefficiency became widespread therefore government decided to sell out the equity of public enterprises to the private entrepreneurs.
NAVRATNAS: Referred to nine profit-making companies that are called the epicenter of growth in the country by the government. These provided infrastructural base and source of employment as well.
3. GLOBALISATION: Is a process that allows openness, economic interdependence and deepening of economy’s integration into the world economy. In simple terms, free flow of trade and capital across the borders.
