Changes in India’s Foreign Trade after Independence

Foreign trade has been considered as an engine of growth and a poor country cannot afford the luxury of foregoing foreign trade.

Foreign trade- (a) permits proper use of the resources of the country; (b) makes available necessary inputs for industrialisation; (c) provides outlet for surplus production; and (d) helps a country to deal with the periods a natural calamities (droughts, floods, etc.) through import of food grains and other necessary consumer goods.

An appropriate and skillfully designed foreign trade policy is essential for the planned accelerated economic growth in a developing country.

The pattern of India’s foreign trade before independence was that of a colonial and agricultural country. Most of the trade occurred with England and Common-Wealth countries. The Exports were mostly confined to a few primary commodities. The imports, on the other hand, consisted of manufactured articles.

Though the balance of trade was favourable, but it concealed a low level of industrialisation in the country. After independence, the pattern, of India’s foreign trade has undergone medical changes mainly as a result of industrial progress during five year plans.

The changes can be studied under the following headings:

A. Volume of Trade:

The volume of India’s foreign trade has increased considerably during the planning period. It has increased from Rs. 1250 crores in 1950-51 to Rs. 3169 crores in 1970-71, Rs. 19260 crores in 1980-81 and Rs. 2286500 crores in 2009-10. The expansion was particularly very fast after 1970-71. The pattern of India’s foreign trade was completely change as a result of economic development and industrialisation during the planning period.

It is no longer confined to a few countries or few commodities. Now India has trade relations with almost all the countries of the world. Exports cover over 9300 commodities to about 220 countries. Imports from about 180 countries accounts for over 8200 commodities. Changes in the volume of India’s foreign trade during the planning period are shown in Table 1.

Table 1 indicates the following facts:

(i) The total volume of India’s foreign trade (i.e. including imports and exports) have increased from Rs.1250 crores in 1950-51 to Rs. 38771644 crores in 2011-12. The increase has been more than 3000 times.

(ii) The value of India’s imports has increased from Rs. 650 crores in 1950-51 to Rs. 2394647 in 2011-12, thus registering an about 3700 times increase.

(iii) The value of India’s exports, which was Rs. 600 crores in 1950-51, increased to Rs. 1482517 crores in 2011-12. The value of exports increased by about 2500 times.

(iv) Over the years, the value of imports has increased much faster than that of exports.

B. Balance of Trade:

After independence, India has been constantly experiencing an adverse balance of trade (i.e., the difference between the value of exports and the value of imports) during most part on the planning period.

There were, however, two exceptional years, i.e., 1972-73 and 1976-77, when the balance of trade has shown small surplus, (i.e., of Rs. 104 crores and Rs. 72 crores respectively). The trend of India’s balance of trade is clear from Table 1. The balance of trade deficit which was Rs. 50 crores in 1950-51, rose to Rs. 10640 crores in 1990-91.

What is more significant is that during the recent years, the deficit in India’s balance of trade has reached enormous heights and there is no improvement in the situation in sight. Since 1980-81, the trade deficit has exceeded Rs. 5000 crores every year. In 1995-96, the balance of trade deficit was Rs. 16325 crore. It rose to Rs. 27302 crore in 2000-01 and Rs. 367664 crore in 2007-08.

In a developing country, the deficit in the balance of trade in not unexpected. Heavy imports of machinery, raw materials, technical know-how are necessary to build up the industrial base of the country during the process of economic development.

But the matter of serious concern is the recent substantial increase in the value of imports which is mainly due to rapidly increasing bill of crude oil and petroleum products and not due to the increase in developmental imports.

On the other hand, the present environment for India’s exports is not so favourable because of slow-down in some of the major economies of the world, stagnation and increasing protectionist barriers by the developed countries.

An important feature of India’s trade balance is that during 1980s, the annual rate of growth of exports has been consistently higher than that of imports. This fact is also reflected in the steadily improving export-import ratio (or coverage ratio), which was only 53.5% in the beginning of 1980s and has increased to 75.4% towards the end of the decade.

Further, as a result of various structural reforms in external sector, the export-import ratio has sharply increased to around 85% during 1990s. All this indicates a definite improvement in India’s balance of trade position during 1990s. The export-import ratio was 86.7% in 1995-96, 88.2% in 2000-01, and 60.7% in 2009-10.

However, trade deficit started increasing sharply since 2004-05. This is clearly indicated by a continuous fall in the export-import ratio over the year. The export-import ratio, which was 88.2% in 2000-01, decreased to 75.8% in 2005-06 and further to 60.7% in 2011-12. This increase in the trade deficit is mainly due to the sharp increase in imports and prices of petroleum and petroleum products.

C. Composition of Trade:

Composition of foreign trade refers to the composition of imports and exports. A study of the changes in the composition of foreign trade helps us to analyse the rate and direction of economic progress in the economy.

For example, the speed at which a country’s imports of manufactured products decline and export of such products increase is considered as an indication of the speed of economic development in the country. Since independence the composition of India’s foreign trade has changed in accordance with the economic progress of the country.

These changes are studied under the following two heads:

1. Changes in the Composition of Imports:

After independence, as a result of the changing requirements of the process of industrialisation, there has been a shift in India’s import trade from primary products to capital goods and other intermediate manufactures. Previously, during the first two plans (i.e., from 1950-51 to 1960-61), India’s major imports consisted of food grains, cotton, jute, etc. But, after that the trend has changed.

Now the import of primary fertilisers iron and steel, non-ferrous metals, and other industrial inputs has increased substantially. The changes in the composition of imports have occurred to meet the consumption and investment needs of the growing economy.

2. Changes in the Composition of Exports:

As a result of industrial progress during the planning period, there has been an increasing diversification of Indian exports over the years. Before independence and during the initial years of planning, India’s major exports were primary products like tea, jute, cotton, textile.

As the economy progressed, a large number of finished goods, like capital goods and other engineering items, chemical and chemical products, leather and leather manufactures, readymade garments, handicrafts, etc. have entered the export list and their share has increased considerably.

Since the beginning of 1980’s crude petroleum has emerged as a significant item in Indian exports. The transformation in the composition of India’s exports has been made possible because of rapid growth and diversification of Indian industries.

Table-2 gives the percentage share of broad commodity groups in India’s total imports and exports.

Among the Imports:

(a) The share of food and live animals has declined sharply from 19.1% in 1960-61 to 2.9% in 2013-14.

(b) The share of raw materials and intermediate manufactures (particularly of petroleum oil and lubricants, fertilizer’s, and pearls and precious stones) has increased considerably from 49.2% in 1960-61 to 84.2% in 2013-14. In 2002-03, it was 61.2%.

(c) Capital goods had accounted for about one-third of imports in 1960- 61 which fell to around one-tenth in 2013-14.

Among Exports:

(a) The share of agriculture and allied products has declined from 42.2% in 1960-61 to 13.7% in 2013-14.

(b) On the other hand, the share of manufactured goods (particularly of readymade garments, leather and leather manufactures, and handicrafts) has increased sharply from 45.3% in 1960-61 to 63.5% in 2013-14.

D. Direction of Trade:

Before independence, the direction of India’s foreign trade was determined not on the basis of the principle of comparative cost advantage, but according to India’s colonial relation with England and its colonies or allies. After independence, as India’s political and economic relations with other countries developed, its trade also expanded to many new directions.

The direction of both imports and exports of India has changed significantly. At present, India’s major trading partners are: U.S.A., U.K., U.S.S.R., Japan, Germany, France, Iran, Belgium, Saudi Arabia. Changes in the direction of India’s foreign trade over the years are given in Table 3.

a. Changes in the Direction of Imports:

The following are the major trends in the direction of India’s import trade:

(i) Formerly, there were many countries with whom we had no or insignificant trade. But, at present, we have trade relations with most of the countries of the world.

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

(iii) In the year 1950-51, the combined share of U.K. and U.S.A. in India’s imports was 39.1%; U.K.’s share was 20.8% and U.S.A.’s share was 18.3%. The combined share of these two countries declined to 35.5% in 1970-71, to 18.7% in 1980-81 and to 11.7% in 2000-03.

England’s share has declined faster than that of America and at present there is a change in the relative position of U.K. and U.S.A. with the latter pushing down the former in the lower position.

(iv) India’s imports from other developed countries have expanded rapidly during the planning period. For example, imports from Japan have increased from 3.0% in 1950-51 to 5.0% in 2002-03 and from Belgium increased from 1.4% in 1950-51 to 6.0% in 2002-03. Germany’s share in India’s imports was 11 % in 1960-61 and 3.9% in 2002-03.

(v) Another significant development is the emergence of socialist countries as major sources of India’s imports. Imports from U.S.S.R., which were negligible in 1950-51, have increased rapidly from 1.4% in 1960-61 to 8.1% in 1980-81. Imports from Russia were 1.0% in 2002-03.

(vi) The joint share of oil producing countries, i.e., Iran, Iraq, Kuwait and Saudi Arabia, in India’s imports has increased considerably from 7.7% in 1970-71 to 27.8% in 1980-81. The share has, however, fallen to 5.3% in 2002-03.

(vii) The share of developing countries in India’s imports is steadily increasing from 11.8% in 1960-61 to 14.6% in 1970-71 and 18.4% in 1990-91. In 2002-03 it was 19.6%.

(viii) At present (2002-03), India’s biggest suppliers are: Asia, U.S.A., Belgium, U.K., Japan, Saudi Arabia, Germany, Kuwait and Africa. These countries account for 43.4% of India’s total imports.

(ix) In main reasons for the diversification and increase in the sources of India’s imports and relative decrease in England’s share after independence are- (a) diversified and increasing demand for imports arising from development requirements; (b) availability of goods of required quality and at cheaper prices in countries other than U.K. (c) rapid increase in the price of certain goods, particularly that of petroleum and petroleum products; (d) bilateral trade agreements with socialist countries; (e) nature of aid and grants necessitating trade with countries other than U.K.; etc.

b. Changes in the Direction of Exports:

The direction of India’s exports has also undergone fundamental changes during the planning period.

Main features of the changes in the direction of India’s exports are given below:

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

(ii) During the first decade of planning period, India depended on U.K. and U.S.A. for bulk of its exports. The combined share of U.K. and U.S.A. in the years 1950-51 and 1960-61 were 42.6% and 43% respectively. This share fall to 25.4% in 2002-03.

(iii) After 1960-61, England’s share in India’s exports has been steadily decreasing. It has declined from 27% in 1960-61 to 4.7% in 2002-03. U.K. has shifted from its top position in 1950-51 to a lower rank.

(iv) America, however, continues to maintain its position among the biggest purchasers of Indian exports. Its share in India’s exports was 16% in 1960-61, 18.5% in 1987-88 and 20.7% in 2002-03.

(v) Since 1960-61, exports to other advanced countries has been expanding at a rapid speed. Russia’s share in India’s exports has increased significantly from a mere 1.8% in 1950-51 to 16% in 1989-90.

Now it has declined to 1.1% in 2002-03. Similarly, the share of Japan rose from 1.7% in 1950- 51 to 3.5% in 2002-03 and the share of Germany increased from 3% in 1960-61 to 4.0% in 2002-03.

(vi) At present (2002-03), U.S.A. occupies the top position among the buyers of India’s exports, followed by Asian countries, U.K., Germany, Japan, Belgium, Africa in the descending order. These countries account for 65% of India’s total exports.

(vii) Most of India’s exports are still directed towards advanced countries. The share of developing countries which was 20% in 1970-71 has become 30.8% in 1999-2000. However, there is good potential for expansion of exports in these countries.

(viii) The main reason for these changes in the direction of India’s exports is that during the process of economic development there arose a need for finding new markets- (a) for the traditional products and (b) for rapidly expanding exports of non-traditional products made possible through diversified industrial growth.

c. Direction of Trade (Present Position -2013-14):

Table-4 shows the recent position in India’s direction of foreign trade. It indicates India’s major trade partners (i.e., the countries from which India imports and to which India exports) along with their percent share in India’s total imports and exports in the recent years.

(i) India has trading relations with all the major trading blocks and all the geographical regions of the world.

(ii) There has been significant market diversification in India’s trade in recent years. This has helped the country to cope with the sluggish global demand which owes to a great extent to the euro zone.

(iii) Region-wise, India’s trade share to Europe and America has declined while that of Asia and Africa has increased over the years.

(iv) During 2013-14, India’s export share to Europe was 18.6% and that of America wasl7.3%. On the other hand, the export share to Asia stood at (49.4%) and that of Africa stood at 9.9%. The top five countries of export are: U.S.A., U.A.E., China, Hong Kong and Singapore.

(v) As regards the direction of imports, during 2013-14, Asia accounts for the highest percentage share in India’s total imports with the share of 60.8%, followed by Europe (15.6) and America (12.8).The top five countries of import are China, Saudi Arabia, UAE, U.S.A. and Switzerland.

E. Major Imports:

India’s major imports with their values are given in Table 5.

F. Major Exports:

India’s major exports along with their values over the years shown in Table 6.

Composition of Trade (Present Position 2014-15):

(i) The commodity composition of India’s foreign trade has undergone many changes since liberalisation during 1990s and has been driven by trade policy, movements in international prices and the changing pattern of domestic demand.

(ii) At present, India’s exports are dominated by petroleum products, gems and jewellery, agriculture and allied products, chemical and allied products, transport equipment and machinery.

(iii) India’s major imports are: petroleum (crude and products), gold and silver, electronic goods, pearls, precious stones and machinery other than electrical.

G. Other Features:

Other features of India’s foreign trade are given below:

1. Reduction of India’s Share in World Trade:

India’s share in the world trade has been continuously declining both in terms of imports and exports. During 1950, India accounted for about 1.8% (1.85% of exports and 1.71% of imports) of world trade. It has declined to 0.65% (0.64% of exports and 0.65% of imports in 1970 and further to 0.53% (0.50% of exports and 0.56% of imports) in 1991.

However, since 1991, the secular decline in India’s share has been arrested and reversed. In 1994, India’s share in world trade was 0.61% (0.60% of exports and 0.63% of imports).

As per World Trade Organisation (WTO), India’s share of exports and imports increased from 0.8% and 1.0% respectively in 2004 to 1.7% and 2.5% in 2013. Its ranking in terms of leading exporters and importers improved from 30 and 23 in 2004to 19 andl2 respectively in 2013.

2. Less Trade with Developing Countries:

The bulk of India’s trade is either with the developed countries of the West or with the oil producing countries. India’s trading relations with the developing countries of South-East Asia. Middle-East, East Africa and even with its neighbours are at low level and are not much improving. There is, however, a good scope for expanding trade (particularly exports) in these countries.

3. State Control in Foreign Trade:

India’s foreign trade is fully controlled by the government. The foreign trade policy of government of India is primarily growth-oriented. Its main objective is to discourage imports and, encourage exports. The government has undertaken several measures relating to monetary, fiscal and industrial policies and established a number of institutions for the promotion of India’s exports.

In order to achieve high export growth and increase the economy’s participation in the dynamics of foreign trade, the government has been following a new liberalised export-import (EXIM) policy since 1991. This policy aims at removing various quantitative and qualitative restrictions on trade, simplifying trade procedures, and promoting free trade.

4. Strict Exchange Control:

Till 1980s, limited foreign exchange reserves have led to the adoption of a policy of strict exchange control in India. All foreign exchange earned through exports have to be surrendered to the government. Similarly, nothing can be imported without the permission of the government.

5. Liberalised Exchange Rate System:

In 1992-93 budgets, the government adopted the Liberal Exchange Rate Mechanism System (LERMS) which introduced partial convertibility of rupee. Again, in 1993-94 budget, full convertibility of rupee on trade account was introduced which allows all foreign exchange earners to convert 100% of their earning at market rate. Finally, in August 1994, the government announced current account convertibility and liberalised invisible payments.