India’s Foreign Trade: A Study of Emerging

Trends and Patterns

Prof. A.R. Dubey1
Abstract
The Indian economy has emerged as one of the fastest growing economies of the
world. The major contributors of growth are a spurt in exports, resurgence of the
manufacturing sector, and substantial flow of foreign direct investment that has
complemented the domestic investment. There has been significant improvement in
macroeconomic stability which is result of economic reforms introduced in 1990s in
the context of globalization, and revival of Indian economy from crisis, and meeting
out challenges in the liberalized economy. India has also managed foreign trade and
balance of payment due to introduction of external sector reforms in 1990s.
However, growth in the near future is likely to be driven by investment. There has
been paradigm shift in India’s foreign trade which shows the significant impact of
trade reforms. Present paper purports to examine the emerging trends and patterns
of India’s foreign trade in the light of trade reforms.
A major feature of India’s economic reforms in the 1990 was the
opening of the Indian economy to foreign trade and foreign investment. Thus,
the 1991 marked a break in policy with the past in that India under took
extensive trade liberalization onwards. The decade of 1980 was mainly
devoted to experimental but substantial deregulation of the domestic industrial
policy regime, which had become highly restrictive. The 1991-92, trade policy
reforms attempted for the first time to dismantle the imports substitution
regime and initiate a gradual but determined process of tariff reduction in the
first half of the 1990s although there was some reversal in the second half
(Ahluwalia, 2006). The reforms in trade policy along with changes in industrial
policy in the policy towards foreign investment in 1990s were aimed at making
Indian industry competitive through facilitating technological upgradation,
improving operational efficiency and encouraging investment in export
oriented sectors. In this part of the dissertation, an attempt has been made to
review the trade policy reforms and examine the trends and patterns in India’s
foreign trade.
1
Professor, Marketing in School of Business & Economics, Dilla university, Ethopia
1
 These reforms are aimed at reducing controls and restrictions on
imports, exports and foreign exchange transaction by the proposed abolition
of export subsidies; liberalization of the import of gold and silver; and
competitive market determination of exchange rate of Indian rupee. In
essence, the trade reforms aim at making the trade regime transparent,
reducing rent-seeking activities and increasing the price-sensitivity of
tradeable goods and services.

Trade Policy Reforms:

At the outset, it should be noted that India did not have a clear trade
policy before independence, though some type of import restriction - known as
discriminating protection was adopted since 1923 to protect a few domestic
industries against foreign competition. It was only after independence that a
trade policy, as part of the general economic policy of development, was
formulated by India.

In the pre-Reform period, India's export and import policy was guided by
the export and import control act of 1947. In 1977 an additional order, namely,
the export control order, were introduced and the subsequent annual policy of
imports and exports was based on these legislations. A long term trade policy,
for three years was announced in 1985 by the government and some concrete
steps towards liberalization were taken within the framework of economic
reforms. In essence, the export and import policy determined, in great detail,
the import procedures that were applicable to specific products, license,
importers entitlement as well as other details relevant for the import of goods
and commodities of different categories of importers. Interestingly, the trade
policy reforms under national economic reforms can be treated as a part of
evolving trade policies under the following three phases:

Phase I: The Age of Structural Changes (1950-1960):

2
 In a striking similarity, with a host of other countries emerging from the
yoke of colonialism, policy makers in India stressed the need for rapidly
industrializing the economy with emphasis on basic and heavy industries and
supported in the external sector by a combination of initial import restrictions,
adaptation, protection and cautious utilization of scarce foreign exchange
resources. Given the predominant share of primary exports in the export
basket and the hostile international environment for primary commodities,
export pessimism gained ground. Therefore, import substitution was accepted
not only as a correct strategy but also inevitable in a continental economy like
India. While the overall strategy resulted in a strong and diversified industrial
base, it also led to a high cost economy, as reflected in declining productivity
across a number of industries and a positive discrimination against exports.

Phase II: The Transition (1960's-1990):

Even as export pessimism, coupled with import substitution, continued

to hold sway, a realization that exports could still be promoted through
concerted government action also gained ground. It was realized that steps
must be taken to mobilize public opinion in favour of expanding exports. On
the import side, a more liberal view of self-reliance evolved over time with the
emphasis moving from import substitution per se to efficient import
substitution. In fact the Abid Hussain Committee which was et up in 1984
provided the impetus for undertaking wide-ranging policy actions to provide
export promotion an equal plank in policy formulation with import substitution.

Phase III: Outward Orientation (1991 Onwards):

As noted earlier, the 1991 trade policy reform measures were aimed at
integrating industrial, trade and exchange rate policies to enhance the
efficiency in the economy. The object of these measures has been aimed to
eliminate discretionary controls on international trade transactions, reduce the
nominal as also the effective protection available to domestic industry, and to
3
bring domestic prices closer to world prices. In this context, it is important to
distinguish between thee dimensions of trade policy reforms. First, a rapid
dismantling of quantitative restrictions on imports and exports; Second a
substantial reduction of taxes and subsidies on trade; Third, several
adjustments in the exchange rate.

In fact the process of dismantling quantitative restrictions on, or

licensing of, imports and exports, which was initiated in the statement on trade
policy placed before the Parliament in mid-August, 1991, culminated in the
export-import policy which was tabled in the Parliament in end-March, 1992.
Quantitative restrictions on most imports and exports, except for specified
negative lists, were eliminated.

In the sphere of imports, the negative list is made of three categories:

the prohibited, the restricted and the canalized importable only through
designated State trading organizations. Apart from this negative list which
includes most consumer goods, there are no restrictions on imports other than
the tariffs payable. The actual-user condition, which prohibited the resale of
imports, and the phased manufacturing programme stipulation, which
specified local content requirements have been removed. In the sphere of
exports, the negative list is also made up of three principal categories. Those
that are prohibited or canalized are only a few. The restricted items which are
subject to licensing limits on quantities, or minimum export prices, span a
much wider range that includes most of the agricultural commodities and
several unprocessed or semi-processed materials where there are concerns
about domestic prices or the terms of trade. There has been a substantial
reduction in import duties, customs duties, tariffs on imports of raw materials
and manufactured intermediaries since the inception of economic reforms
(Natraj, 2000).

4
 From the above analysis, it is evident that trade policy reforms under
national economic reforms are a part of continuing trade policy reforms in
India. Nevertheless, the trade policy reforms since 1991 are strikingly difficult
in approach and content as compared to pre-1991 trade policies. Accordingly,
the trade policy reforms since 1991 mark a distinct stage in the evolution of
India's trade policy over the decades.

Trade Policy Reforms Measures Under Export-Import (EXIM) Policy:

Since the reforms process started in 1991, the EXIM policy has played
an important role in liberalizing the controls on external sector. Two types of
control measures, not necessarily used mutually exclusively, are tariffs and
licensing mechanism. For instance, for a long time, India has had one of the
highest tariff structures in the world. In the successive budgets during the
post-reforms period, these rates have been brought down substantially. The
average collection rate, defined as the total customs duty realized divided by
total imports, declined from 47 per cent in 1990-91 to 31 per cent in 1997-98.
In fact, the decline in tariff protection has taken place across the product
sectors. However, this decline has got reserved by the imposition of special
additional duty during 1998-99 and a surcharge in 1999-2000.

On the other hand, India has also used the EXIM policy to make exports
more competitive as well as profitable. For this purpose, EXIM Policy provides
for special schemes, such as Export Promotion Capital Goods Scheme
(EPCG). This scheme allows for access to imported capital goods at a
customs duty, which is lower than the normal duty applicable, provided export
obligation is accepted by the importer. The lower rate of duties makes export
production more cost competitive. The policy also seeks to make exports
more profitable through a system, called Special Import Licenses (SIL). Under
this system, exporters are allowed to import items which are on the restricted

5
list and sell these at a profit. The policy also allows sale of the SIL's, the
premium on the sale of the SIL adds profit to export transactions.

India now follows a five year EXIM policy, though some fine-tuning of
policies is made annually, depending on the evolving trading conditions and
industry's felt needs, in regard to regulation and liberalization of imports and
promotion and liberalization of exports. Of all the policies announced so far
the EXIM Policy for 1992-97 has been the most crucial. The principal
objectives of this policy are as follows:

 To accelerate the country's transition to an internationally oriented

economy with a view to derive maximum benefit from the expanding
global market opportunities;

 To augment the productivity, modernization and competitiveness of

Indian agriculture, industry and services and thereby enhance their
export potential and capabilities;

 To encourage the attainment of internationally accepted standards of

quality and thereby improve the image of India's products abroad;

 To stimulate India's exports by facilitating access to required raw

materials, intermediaries, components, consumables and capital goods
from the international markets;

 To encourage efficient and internationally competitive import

substitution within the liberalized framework of foreign trade;

 To impart greater transparency in the export import policies and

eliminate or minimize quantitative restrictions, licensing and other
discretionary controls; and

 To simplify and streamliner the procedures governing exports and

imports.

6
 These various measures which have been announced under the above
policy for the individual years from 1991-92 to 1996-97 are presented below,
separately for exports and imports.

Export Promotion Policy Measures:

All the export products were allowed to have uniform EXIM scripts at
rate of 30 per cent of FOB (Free On Board) except for metal-based
handicrafts, newspapers, journals, gems and jewellery which continued to
enjoy the higher benefits of replenishment. The scope of export services was
enlarged and the rate of replenishment of service exports was increased from
10 per cent to 30 per cent of net foreign exchange earnings. Export Houses
and Trading Houses were to be strengthened and used as instruments for
promoting exports. The Government allowed for de-controlling of 116 items by
allowing their exports without any licensing formalities. About 29 items shifted
to the Open General License (OGL). Export Processing Zones (EPZ's) and
Export Processing Units (EOU's) were extended to several sectors of the
economy.

In October 1992, the Government granted select exporters (i.e., those

exporters with annual average net foreign exchange earnings of more than
RS. 60 mil. earnings) freely tradable special import licenses that could be
used to import consumer goods specified in the positive list. Partial
convertibility of the rupee was announced. Exporters and recipients of inward
remittances were allowed to receive rupees at the free market rate of 60 per
cent of the foreign exchange. For the balance 40 per cent, the official
exchange rate was applicable. This has been commonly referred to as the
Liberalized Exchange Rate Management System.

In this year, the government simplifies the SIL scheme i.e. granting
exporters annually exporting more than FOB Rs. 100 million, SIL's for an

7
amount varying between 2 per cent and 4 per cent of gross export earnings,
depending on the average export earnings; decanalized import of select
petroleum product and some fertilizers. Full convertibility of the rupee on trade
account was announced. That is, the exporters and those sending remittances
to India could convert respectively all their export earnings and remittances at
the market rate. The numbers of restricted items were further reduced from
439 in March 1990 to 210 in March 1994.

Items subject to control were reduced to 210 in 1994. Export taxes were
abolished. Export subsidies were streamlined. Direct subsidies, in particular,
were to be gradually eliminated and sector specific subsidies were to be
replaced by more general schemes such as not taxing export profits and duty
drawback schemes. In 1997-98 export houses and trading houses were
strengthened and used as instruments for export promotion. They were fully
exempted from paying the Minimum Alternate Tax (MAT). The Export
Processing Zone and Export Oriented Unit facility was extended to several
sectors.

Import Liberalization Policy Measures:

The range of items that could be freely imported was widened through
abolition of import controls. Though consumer goods remained restricted,
almost all items of capital goods, raw materials, and intermediaries could be
freely imported subject to payment of customs duties. This was done through
the introduction of 'negative list of imports' which removed discretionary
powers of the licensing authorities. For instance, several items were shifted
from more restrictive to less restrictive lists. Further, major changes in the
import licensing system were effected by replacing a large part of
administrative licensing of imports by import entitlements linked to export
earnings. The import replenishment system was enlarged, re-structured and
re-named EXIM scrips. EXIM scrips were to be tradable and the premium on
8
the scrips set by the market was expected to represent further incentives to
exporters. The scrips also served as a means of allocating imports to market
forces.

All essential imports are to be financed by the foreign exchange

surrendered at official rates while most of other imports (except restricted and
banned items) free foreign exchange from the market was allowed. The
customs duty on imports was rationalized. The general duty on project capital
goods was reduced from 80 per cent to 60 per cent. In the case of capital
goods, the import duty was reduced from 50 per cent to 60 per cent.

The number of restricted items was reduced to 215. Of these 16 were

prohibited, 109 licensed, 34 canalized and 56 subject to specified terms and
conditions.

Additional steps were taken to liberalize import of consumer goods. The

Government placed sugar, pulses, edible oils, butter oil and skimmed milk
powder on free import list. Textiles and garments were placed on the list of
items that could be imported through special import license.

The EXIM policy was further liberalized. For instance, the negative list
was pruned which now contains 3 prohibited items and 65 restricted items.
The import of gifts no longer requires a customs clearance permit. The Special
Import License (SIL) facility was extended to domestic capital goods suppliers.
Additional SIL was announced for small-scale industries for exploration of new
markets. The threshold limit of zero duty imports was cut to Rs. 5 crores for
agriculture and allied sectors.

The import of capital goods under export promotion and capital goods
schemes (EPCG) was cut to 10 per cent. The threshold limit for zero duty
imports was Rs. 20 crores.

9
 In continuation of the EXIM Policy (1992-97), a new EXIM policy for
(1997-2000) has been formulated. The new policy reflects further
strengthened and consolidation of liberalization process initiated in the
previous EXIM policy 1992-1997. The policy for the first time emphasized
transparency in export and import policies and sought to maximize gains in
terms of growth, efficiency, productivity, employment diversification and quality
from the expanding global market operations. Some of the highlights of the
policy are as follows:

 The restricted list of imports has been substantially pruned. Import of

542 items has been liberalized which includes about 150 items that can
now be imported against SIL. Restrictions have been placed on five
items on grounds of environment, safety, strategic importance, public
health and security.

 The Export Promotion Capital Goods Scheme (EPCG) has been further
streamlined. Capital goods including spare parts upto 20 per cent of the
cost, insurance and freight value of the capital goods may be imported
at a concessional rate of customs duty subject to an export obligation to
be fulfilled over a period of time.

 Value-based advance licensing scheme discontinued, a new simplified

passbook scheme has been introduced.

 The SIL facility has been extended to domestic capital goods suppliers.
Additional SIL has been announced for small-scale industries for
exploration of new markets.

 The threshold limit for zero duty imports (which was earlier 20 crores)
has been cut to 5 crores for agriculture and allied products.

It might be added here that the Modified EXIM Policy for 1999-2003 has
carried on the trade policy liberalization further. For instance, about 894 items
10
being shifted to the Free list from the current negative list and another 414
items being placed in the SIL list. After this only 667 items have remained in
the restricted list; duty free import of consumables upto certain limits for gems
and jewellery, handicraft and other sectors; and no additional customs duty on
import of capital goods under zero duty EPCG scheme in Marine and
Electronics sector.

Trade policy measures in the recent past were mainly to mitigate the
effects of global recession. Three stimulus packages were given in the second
half of the 2008-09 to help export sector in general and some sector affected
or likely to be affected by the global recession in particular. Providing good
transport / logistic support to India’s foreign trade and the resolution of
problems experienced by trading community in the carriage of goods by
courier, sea, air, rail and road are also necessary ingredients of a good trade
policy. The Government of India has been taken steps for greater
containerization, computerization of cargo clearance and electronic data inter-
change, warehousing, setting up of air cargo complexes, inland container
depots, container freight stations etc. The government has also enhanced the
outlay under the scheme of Assistance to States for Developing Export
Infrastructure and Allied Activities in order to encourage exports by the states.
Government of India has also introduced Special Economic Zone Act, 2005
with the main objective of generation of additional economic activities,
promotion of exports of goods and services, promotion of investment from
domestic and foreign sources, creation of employment opportunities and
development of infrastructure facilities. Various incentives and facilities offered
to units in SEZs for attracting investments. These incentives and facilities are
expected to trigger a large flow of foreign and domestic investment in SEZs,
particularly in infrastructure and productive capacity, leading to generation of
additional economic activity and creation of employment opportunity

11
(Economic Survey, 2008-09). Government of India has also provided relief to
manufacturers, exporters and financial sector during the financial recession.
Government of India has also increases custom duty in some cases while
contingency trade policy and non-tariff measures reduce the intensity in recent
years and have started resulting in protectionist tendencies of different
countries as a reaction to the global economic crisis.

Growth Trends in India’s Foreign Trade:

Trade policy reforms undertaken since the 1990s have resulted in
growth in export and managing the balance of trade. India has engaged
herself, constructively in multilateral trade negotiations under the WTO. India
has forcefully articulated its position which reflects the concerns of the
developing countries (Reddy, 2006). Reforms in the trade policy regime have
resulted in growth of India’s foreign trade.

An important aspect of the trade of a country is its composition. Imports

are indicative of what types of goods a country lacks and how much of them it
needs or is able to get. Exports bring out the fact about the goods that a
country has and how much of these it can and is willing to sell. Seen over a
period of time changes in the composition of trade mirror the developments
taking place in the domestic structure of production. For example, an
industrializing country would import largely capital goods and export non-
industrial products. A highly industrialized economy would import raw
materials and goods in which it does not have comparative advantage, and
exporting largely industrial goods. Thus, the composition of trade can enable
one to know the level of development of a country and its economic structure.

In India, imports are basically classified into bulk imports and non-bulk
imports. Bulk imports are further divided into Petroleum, Oil and Lubricants
(POL) and non-POL items such as consumption goods, fertilizers, iron and

12
steel. Non-bulk items comprise of capital goods (mainly electrical and non-
electrical machinery), pearls, precious and semi-precious stones and other
items.

It is evident that there has been a decline in the growth of import of

certain commodity groups like food and allied products though there have
been exceptions also. The annual growth of import of food and allied products
which stood at -22.0 per cent in 1991-92 increased to 63.2 per cent in 1992-
93, declined to -20.7 per cent in 1993-94 and drastically rose to 163.2 per cent
in 1994-95, and stood at -12.4 per cent and 19.7 per cent in 1995-96 and
1996-97. Again there was sudden spurt in the annual growth of import of food
and allied products in the year 1997-98 to 80.76 per cent and declined
suddenly to 1.01 per cent in 1998-99. The growth of import of petroleum, oil
and lubricants (POL) has also increased over the years. The imports of POL
stood at -11.0 per cent in 1991-92 and 27.0 per cent in 1995-96 and 33.8 per
cent 1996-97. The import of fertilizers is also on the rise from -3.1 per cent in
1991-92 to 59.9 per cent in 1995-96 and -45.7 per cent in 1996-97. Other
commodities which recorded significant growth of imports is capital goods
which stood at 35.3 per cent in 1995-96 and -10.9 per cent in 1996-97, -7.42
per cent in 1997-98 and finally further declined to -31.95 per cent in 1998-99.
Paper, paperboards and manufactures, chemical categories show fluctuating
trends. The import of iron and steel has more or less remained constant
between 3 per cent and 4 per cent but has declined from -15.78 per cent in
1997-98 to -22.93 per cent in 1998-99. Another commodity group, which ha
shown significant increase, is Pearls, Precious and Semi-precious stones. The
import of these items stood at -6.0 per cent in 1991-92, 38.1 per cent in 1994-
95 and 44.6 per cent in 1996-97, but also marginally declined to 42.44 per
cent in 1997-98. Surprisingly, during 1988-89, the import share of these items
has drastically declined to -1.04 per cent.

13
 The percentage share of various commodity groups in India's imports
reveals that the contribution of food and allied products, has ranged from 2.2
per cent in 1991-92 to 3.4 per cent in 1996-97, 4.68 per cent in 1997-98 and
4.54 per cent in 1998-99. Therefore, the contribution of food and allied
products has in fact declined. In the same way, the share of POL has
marginally declined from 26.1 per cent in 1996-97 to 22.85 per cent in 1997-
98 and 14.9 per cent in 1998-99. Further, the share of fertilizers marginally
increased from 2.4 per cent in 1996-97 to 3.4 pr cent in 1997-98 and again
declined to 1.2 per cent in 1998-99. The share of paper and paperboards also
declined and so also import of capital goods. The share of capital goods
declined from 28.2 per cent in 1995-96 to 23.9 per cent in 1996-97 and further
to 17.5 per cent in 1997-98 and 16.4 per cent in 1998-99. Finally the share of
commodities under the group others has also declined from 24.2 per cent in
1996-97 to 5.3 per cent in 1997-98 and stood at 10.06 per cent in 1998-99.

Next, the growth and composition of exports of India are broadly

classified into four categories:

 Agriculture and allied products which include coffee, tea, oil cakes,
tobacco, cashew kernels, spices, sugar, raw cotton, rice, fish and fish
preparations, meat and meat preparations, vegetable oils, fruits,
vegetables and pulses.

 Ores and minerals include manganese ore, mica and iron ore.

 Manufactured goods include textiles and ready-made garments, jute

manufactures, leather and footwear, handicrafts including pearls and
precious stones, chemicals and engineering goods and iron and steel
and

 Mineral fuels and lubricants.

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 There has been a continuous decline of exports of Agriculture and Allied
products from 9.3 per cent in 1991-92 to 11.1 per cent in 1996-97 except for
1993-94 when it was 27.4 per cent and 1995-96 it recorded a high of 45 per
cent. However, export of Agriculture and Allied products recorded a high of
19.79 per cent in 1997-98 to a fall of 8.30 per cent in 1998-99. Exports of Ores
and Minerals have shown fluctuating trends with 11.2 per cent in 1991-92 to -
20.3 per cent in 1992-93, 20.4 per cent in 1993-94, declined to 11.3 per cent
in 1994-95, rose to 18.9 per cent in 1995-96 and again declined to -2.4 per
cent in 1996-97, -14.24 per cent in 1997-98 and -37.08 per cent in 1998-99.
The only commodity group, which has shown a rising trend till 1995-96 is the
manufactured goods. For instance, the growth of manufactured goods stood
at 0.7 per cent in 1991-92, 6.2 per cent in 1992-93, 19.8 per cent in 1993-94,
declined to 16.3 per cent 1995-96 and further decreased to 3.6 per cent in
1996-97, increased again to 4.29 per cent in 1997-98 and showed a decline of
-11.45 per cent in 1998-99. Even the exports of crude and petroleum products
have continuously declined from -20.9 per cent in 1991-92 to 14.8 per cent in
1992-93 and stood at 6.1 per cent in 1996-97, declined to -29.01 per cent in
1997-98 and -71.05 per cent in 1998-99. The category of "Other Exports" has
also shown persistent decline from -94.2 per cent in 1991-92 to -35.5 per cent
in 1996-97. It stood at 2.35 in 1997-98 and 94.27 per cent in 1998-99.

When we look at the percentage shares of these commodity groups in

country's total exports, the share of exports of agriculture and allied products
remained more or less the same. It stood at 17.9 per cent in 1991-92, 20.4 in
1996-97, and declined to -12.17 per cent in 97-98 and -14.86 per cent in 98-
99. On the other hand, export share of Ores and Minerals has marginally
declined from 5.2 per cent in 1991-92 to 3.5 per cent in 1996-97. It stood at
3.1 per cent in 1997-98 and 2.4 per cent in 1998-99. Most importantly, export
share of manufactured goods to total exports has been consistently ranging

15
between 73 per cent to 75 per cent throughout. The export share of Crude and
Petroleum products has also declined from 2.3 per cent in 1991-92 to 1.5 per
cent in 1997-98 and 0.4 per cent in 1998-99. On the contrary, the contribution
of the commodity group others has also increased from 1.0 per cent in 1991-
92 to 1.03 per cent in 1997-98 and 10.06 per cent in 1998-99.

India's traditional exports consisted of raw jute and manufactures, raw

cotton and manufactures, tea, oil seeds, hides and skins, etc. For a long time
before independence and even after planned economic development started,
India exported mainly these goods. Some of these goods have continued to
be important even now but since 1960, due to the impact of importance.
These items consist of engineering, goods, handicrafts which include pearls,
precious and semi-precious stones and jewellery, iron and steel, iron ore,
chemicals, readymade garments, fish and fish preparations. These goods
constitute more than 50 per cent of India's export now. Recently, India's
software exports are also doing extremely well.

Under this head, the country-wise sources of our imports and country-
wise destination of our exports are described. The Organization for Economic
Co-operation and Development (OECD) region (including USA, European
Union and Japan), Asia and Latin America are the main destinations of our
exports. While OECD countries as a group maintained their share (around 50
per cent) in our total exports in 1997-98, the share of advanced industrial
economies as a whole declined due to depressed demand in Western
European and Japan. There was marginal improvement in the share of EU
due to mainly higher exports in Belgium, France and Italy. While our exports to
the USA have recovered well in current year (they stood at 1.6 per cent in
1996-97 and 19.5 per cent in 1997-98 and 21.78 pe cent as compared to 17.3
per cent in 1995-96) the share of our exports to the East-Asian countries

16
marginally increased from 14.2 per cent in 1995-96 to 14.24 per cent in 1996-
97, declined to 12.63 per cent in 1997-98 and 10.68 per cent in 1998-99.

As regards the sources of imports from EU, USA, and Japan have
declined over the years however, imports from OPEC stood at 18.9 per cent
in 95-96 and further increased to 26 per cent in 1996-97 and stood at 23.1 per
cent in 1997-98 and marginally decreased to 18.11 per cent in 1998-99.
Imports from Russia range between 1.7 per cent in 1992-93 to 1.6 per cent in
1996-97 and 1.7 per cent in 1997-98, to 1.26 per cent in 1998-99 with a high
of 2.3 per cent in 1995-96. In addition, imports from South-East Asian
countries has increased from 8 per cent in 1993-94 to 10.2 per cent in 1995-
96 and stood at 10 per cent in 1996-97 and stood at 10.04 per cent in 1998-
99. Finally, imports from other countries have marginally declined.

The trends in the direction of India's trade also show that India has
found new trading partners. This is in consonance with the basic objective of
India's trade policy reforms i.e. increasing India's exports which can be done
trough diversifying India's export destinations. Before independence, UK was
the main partner of India, accounting for 34 per cent of India's exports and 30
per cent of India's imports. The diversification of certain industries along with
specialization in certain goods has helped India to secure new markets for her
products. Besides U.K., the other countries of importance are USA, Japan,
Russia, West Germany and members of the OPEC. India ha also made
substantial inroads into the markets of East and South East Asia. However,
due to the financial crises that hit some of the countries in this region, there
has been a slump in India's exports to these countries.

On the whole, the composition of India's exports and imports a well as

the direction of India's foreign trade shoes that the trends are in line with some
of the basic objectives and reforms undertaken on the trade and external
sector front. In fact, the composition of India's exports and imports over the
17
years reveal that the Indian economy has made substantial progress in
achieving the goal of globalization and closer integration into the world
markets. When one examines the composition of India's exports, during the
1990's the broad commodity composition of exports has remained unchanged.
Agriculture and allied products account for about 18 per cent of total exports
and manufactured commodities account for about 75 pr cent. Ores and
Minerals and other products make the rest of about 17 per cent. The stable
commodity composition is also reflected in the fact that the top six
commodities in terms of exports in 1998-99 are the same in 1991-92. These
six commodities account for one half of the total exports from India. Over the
period 1991-92 to 1998-99 the share of these six commodities has increased
from 48.8 per cent to 51.6 per cent. Nevertheless, there has been a
considerable change in the composition of exports because of diversification.
Many new/non-traditional items have become important like gems and
jewellery, readymade garments, instruments and machinery, leather and
leather manufacture, software products etc. are now in the list of export items.
These items number more than 3000 and are also responsive to the fast
changing international situation. The new items of exports are expanding
rapidly and are fast gaining in importance.

But unlike in the case of exports, where the broad commodity

composition was quite stable over the period of the 1990's, in the case of
imports the composition has undergone few changes. First of all, there has
been a substantial fall in the share of the import of petroleum and petroleum
products. Second, there has been steady decrease in the import of capital
goods indicating the competitiveness of the Indian industries to produce the
same and also reflects the capital-intensive nature of the industries being
established in the country.

18
 The direction of India's trade reveals that the EU, USA and Organization
of Petroleum Exporting Countries (OPEC) still continue to be the major
destinations of India's exports and imports. But in the recent past India has
tried to diversify its export basket and as a result India's exports to the
Southeast Asian countries has increased. Most of the traditional items like tea,
coffee, cashew, kernel etc., as also non-traditional items like engineering
goods, garments, pearls, precious stones etc., of exports go to the OECD
countries. The developing countries buy from us cotton textiles, jute, marine
products etc. East European countries take tea, leather and leather
manufacture etc. With the advent of globalization and many economies
resorting to liberalizing their economies, the scope for expanding exports has
increased tremendously which is one of the most important objectives of trade
policy reforms in this country.

The broad composition of exports during the Tenth Plan is shown in

Table 6.4 Total exports grew at about 24 per cent per year but this was largely
because petroleum products grew at 54.32 per cent. Manufactured goods
recorded an impressive compound annual growth rate of 19.92 per cent and
exports of agricultural and allied products also rose at a healthy rate of 16.22
per cent.

The direction of India’s exports may be seen in the Table 6.5. America
and Europe continued to be important destinations of Indian exports although
their combined share declined from 48.62 per cent to 42.12 per cent. On the
other hand, the share of Asia and ASEAN steadily increased during the Tenth
Plan and the reason accounted for nearly half of India’s exports during the last
three years of plan period.

Table: 6.5
Direction of India's Exports

19
 Percentage Share
Region
2002-03 2003-04 2004-05 2005-06 2006-07*

Europe 24.17 24.54 23.55 24.16 22.89

EU Countries (27) 22.55 22.74 21.85 22.53 21.26

Other WE Countries 1.58 1.73 1.65 1.58 1.57

East Europe 0.04 0.07 0.05 0.05 0.06

Africa 4.65 4.82 5.05 5.27 6.63

Southern Africa 1.21 1.24 1.51 1.88 2.23

West Africa 2.02 1.99 1.98 1.84 1.91

Central Africa 0.22 0.24 0.19 0.16 0.16

East Africa 1.20 1.35 1.37 1.39 2.33

America 24.45 20.97 20.10 20.72 19.23

North America 21.99 19.19 17.52 17.82 15.85

Latin America 2.46 1.78 2.58 2.90 3.38

Asia 44.39 47.60 49.50 48.38 49.78

East Asia 1.15 1.10 1.03 0.97 1.18

ASEAN 8.76 9.12 10.09 10.10 9.95

WANA 14.28 15.95 17.04 16.19 18.22

NE Asia 14.92 14.70 15.83 15.74 15.31

South Asia 5.28 6.73 5.51 5.38 5.12

CIS & Baltics 1.75 1.63 1.31 1.21 1.17

CARs Countries 0.16 0.24 0.21 0.16 0.15

Other CIS Countries 1.59 1.39 1.10 1.05 1.02

Unspecified Region 0.59 0.44 0.49 0.24 0.27

Total 100.00 100.00 100.00 100.00 100.00

Note: Figures are provisional.

Source: DGCI&S.
In 2007-08, major exporters were Maharashtra followed by Gujarat,
Tamil Nadu and Karnataka. In terms of export growth rate, the top states were

20
Orissa followed by Madhya Pradesh, Gujarat, West Bengal and Andhra
Pradesh. In April-December, 2008, export growth was the highest in Punjab,
followed by Andhra Pradesh and Orissa (Table 6.6).

Table: 6.6
Major Exporting States
(US$ million)
(April - December) Growth rate
Share
Sl. 2008-09
No. State 2006-07 2007-08 2007-08 2008-09 2007-08 2007-08 (Apr-Dec.)

1. Maharashtra 35873 44841 31978 35720 27.5 25.0 11.7

2. Gujarat 24209 34736 25714 30041 21.3 43.5 16.8

3. Tamil Nadu 13097 14816 10650 12906 9.1 13.1 21.2

4. Karnataka 12676 14641 10253 10045 9.0 15.5 -2.0

5. Andhra 5479 7427 5183 6907 4.6 35.6 33.2

Pradesh

6. West Bengal 4011 5679 3888 4581 3.5 41.6 17.8

7. Delhi 4880 5183 3614 3928 3.2 6.2 8.7

8. Haryana 3792 4414 3042 3437 2.7 16.4 13.0

9. Uttar Pradesh 3632 4295 3098 3193 2.6 18.3 3.1

10. Orissa 1971 3024 1983 2631 1.9 53.5 32.7

11. Rajasthan 3356 3276 2347 2510 2.0 -2.4 6.9

12. Punjab 2148 2598 1744 2372 1.6 21.0 36.0

13. Madhya 1993 2915 1848 2277 1.8 46.3 23.2

Pradesh

14. Kerala 2293 2364 1721 1918 1.5 3.1 11.4

15. Goa 1424 1387 881 1103 0.9 -2.6 25.2

Total Exports 126361 162904 113475 130716 100.0 28.9 15.2

Source: DGCI&S data.

Imports recorded a compound annual growth rate of 29.96 per cent

during the Tenth Plan Period. The high growth of imports was mainly on
account of increase in oil prices. Bulk imports continued to accounts for a
significant share of the total imports during the Tenth Plan mainly on account

21
of crude oil. Crude oil and petroleum products taken together were the single
most important category of imports during the Plan Period. This group
registered a compound annual growth rate of 32.45 per cent during the Plan
Period accounting for about 26 to 30 per cent of the total value of imports
during the Plan Period. The share of machinery and project goods registered
a significant increase during the Plan Period.

The direction of major imports is shown in Table 6.7. The major change
is that Asia and ASEAN region recorded a significant increase during this
period mainly on account of increase of import share of West Asia due to
increase in oil prices. The combined share of imports from America and
Europe was steady during the Plan Period.

Table: 6.7
Direction of India's Imports
Percentage Share
Region
2002-03 2003-04 2004-05 2005-06 2006-07*

Europe 24.98 24.04 22.98 21.18 23.64

EU Countries (27) 20.90 19.29 17.31 17.44 18.25

Other WE Countries 4.07 4.73 5.66 4.72 5.36

East Europe 0.01 0.02 0.01 0.02 0.03

Africa 4.71 3.50 3.02 2.71 5.97

Southern Africa 3.52 2.51 2.06 1.77 1.53

West Africa 0.88 0.74 0.74 0.78 4.30

Central Africa 0.01 0.01 0.02 0.01 0.02

East Africa 0.30 0.24 0.20 0.15 0.12

America 9.86 8.90 8.81 8.75 10.49

North America 8.16 7.37 6.97 6.96 7.41

Latin America 1.70 1.53 1.84 1.79 3.18

22
Asia 30.12 35.36 36.18 34.58 57.51

East Asia 2.32 3.52 3.63 3.54 3.89

ASEAN 8.39 9.51 8.17 7.30 9.49

WANA 5.84 6.30 8.54 7.28 26.85

NE Asia 12.71 15.12 14.95 15.51 16.49

South Asia 0.86 0.91 0.89 0.95 0.79

CIS & Baltics 1.37 1.61 1.76 1.98 1.86

CARs Countries 0.06 0.06 0.06 0.05 0.08

Other CIS Countries 1.31 1.55 1.70 1.93 1.78

Unspecified Region 28.96 25.59 27.25 29.82 0.43

Total 100.00 100.00 100.00 100.00 100.00

Source: DGCI&S.
Following the acceleration of the process of structural adjustment in
1991, India’s foreign trade regime underwent a major transformation. Import
duties were brought down progressively and significantly. Quantitative
restrictions (QRs) have been phased out. Starting from a substantial
devaluation in the initial stages, the exchange rate of rupee has come to be
market-determined. Nominal exchange rate of rupee depreciated
subsequently. Policies and procedures in respect of exports and imports have
been simplified. Following this, Indian economy’s openness measured as the
foreign trade to GDP ratio increased from 13.32 per cent in 1990-91 to 19.28
by 1995-961 though it practically remained the same during the subsequent
period. This has been due to an increase in both imports and exports (Table
6.8). There have, however, been persistent trade deficits which after
remaining stable for some time, tended to be on the higher side from 1995-96
onwards (ISID, 2002)..

23
 The demand for imports is bound to increase due to the envisaged
growth of the economy – raw materials, capital goods, components and
energy. The opening up of import of a variety of consumer goods is also likely
to add to the import basket. India has been also periodically required to
depend on external sources for certain mass consumption items like edible
oils. Since the increase in imports noted above could have been due to
relaxation of the import regime, and thus has been on the expected lines, and
also because the commitments under WTO make the import policies virtually
irreversible, the trade gap could only be dealt with by increasing India’s
exports. Thus to sustain a higher rate of growth while keeping the current
account deficits under control and to make Indian industry competitive, it is
imperative to increase the country’s exports at a fast pace. The emphasis on
increasing India’s exports could be seen from the fact that The Medium Term
Export Strategy 2002-2007 envisages a near doubling of India’s exports to
US$ 80 bn. by the end of the period which implies a compound annual growth
rate of nearly 12 per cent (GoI, 2002).

During the ‘nineties, global capital flows have been dominated by

private sector sources and are characterised by increasing share of non-debt
creating flows. India has been no exception. Coincidentally, sources of direct
and indirect external funding for the corporate sector got diversified. This in
turn implies the shifting of repayment and service obligation from government
to the enterprises. Consequently, it should be expected that foreign exchange
outgo on account of dividend outgo, capital appreciation, interest payment,
etc. would increase. Due to persistent current account deficits, borrowings and
portfolio capital flows contributed significantly to India’s foreign exchange
reserves. Thus, even from this point, faster increase in exports is unavoidable.

India’s exports grew substantially during the ‘nineties whether seen in

terms of absolute values or relative to the GDP or seen in the world’s context

24
(Table 6.9). Since the introduction of new economic policies, India’s exports
have risen from US$ 18 billion in 1991-92 to US$ 44 billion in 2000-02. The
export growth, however, has been quite uneven. While during 1993-94, 1994-
95 and 1995-96 it recorded impressive gains, the annual growth rates fell
sharply in 1996-97 and turned negative in 1998-99. Once again, exports
staged substantial recovery in 1999-00 and 2000-01.

25
 The process has been accompanied by a change in the
composition of India’s exports with an increase in the share of
manufactured items and a diversification of exports. The share of
manufactured goods in the total exports of India increased from 75 per
cent in 1991-92 to 79 per cent in 2000-01. Share of agricultural and
allied products declined from 18 per cent in 1991-92 to 13 per cent in
2000-01. Similar is the case with ores and minerals. Within the
manufactured products too significant changes took place.

Liberalisation of the foreign trade regime has been accompanied

by a transformation of industrial policies. While industrial licensing has
been abolished practically, the obligation to seek permission under the
MRTP Act has been dispensed with. The climate for restructuring of
industrial enterprises is now more favourable as mergers and
acquisitions are decided by the enterprises themselves instead of
being influenced by official approvals. Another major related
development has been the relaxation on import of technology.
Enterprises have thus the freedom to decide on the scale, technology
as also the composition of their production basket. On the other hand,
Indian enterprises are now more exposed to competition both from
within and outside. This is likely to have driven them to improve
quality, productivity and service. These developments should therefore
have forced them to seek external markets on the one hand and make
them better equipped to engage in export trade on the other. While
export-orientation is important by itself, a more relevant measure of a
company’s contribution in the context of a country like India with
persistent balance of payments deficits, is the net earnings of foreign
exchange by the enterprises. In the past, large Indian companies are

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known to be net spenders of foreign exchange. It is of importance to
know how this position has changed in the new regime.

World Trade Volume recovered modestly in 2002-03. India’s

export growth at about 19 per cent during 2002-03 for exceeded world
trade expansion. This help export value as a percentage of GDP to
reach the two digit level for the first time. Imports too grew sharply to
12.8 per cent of GDP I 2002-03 from 12 per cent in the previous years.
Imports and exports together accounted for 23 per cent of GDP in
2002-03 compared to just 15 per cent in 1990-91 (Table 6.10).

Emerging market economies like India were not significantly

affected by the global financial crisis in the initial stages, which had set
in 2007. Balance of payments during 2003-04 to 2007-08 is shown in
Table 6.11. Foreign exchange reserve accounted for 2.3 per cent of
GDP while current account deficit was reported to be 7.9 per cent of
GDP in 2007-08.

A widening of merchandise trade was one way to absorb foreign

savings and the increase in exports and imports was a key component
of the growth process. Exports rose from 11 per cent of GDP in 2003-
04 to 14.1 per cent in 2007-08. The average annual growth rates of
exports during 2005-06 to 2007-08 was 25 per cent. Imports, however,
grew even faster at an annual average rate of 29.5 per cent during
2005-06 to 2007-08 (Table 6.12).

Export performance was dominated by volume growth till 2002-

03. There was a reversal of this trend in 2003-04 with increasing

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contribution of higher unit value in export performance. Subsequent
years witnessed a surge in exports both in terms of volume and unit
value with a relatively higher growth of volume. However, during 2007-
08, export performance was dominated by growth in unit values at 8 .8
per cent mainly due to the rise in commodity prices (Table 6.13).

Table: 6.13
Performance of the Foreign Trade Sector
(Annual per cent change)
Exports Imports Terms of
Trade

Value Volume Unit Value Volume Unit Net Income

(in Value (in Value
US$) US$)

2000-01 21.0 23.9 3.3 1.7 -1.0 8.2 -4.5 18.3

2001-02 -1.6 3.7 -1.0 1.7 5.0 1.1 -2.1 1.5

2002-03 20.3 21.7 0.3 19.4 9.5 10.7 -9.4 10.3

2003-04 21.1 6.0 8.5 27.3 20.9 -0.1 8.6 15.1

2004-05 30.8 17.6 8.9 42.7 14.7 21.6 -10.9 5.0

2005-06 23.4 11.8 9.0 33.8 48.2 -10.7 22.7 36.9

2006-07 22.6 15.8 8.1 24.5 24.1 2.7 5.2 21.8

2007-08 28.9 5.4 8.8 35.4 27.2 -5.4 14.8 21.0

2008-09 3.6 14.4

Source: Calculated on the basis of data from DGCI&S.

India’s share in world merchandize exports after remaining

unchanged at 1 per cent between 2005 and 2006 reached 1.1 per cent
in 2007 and continued to remain at that level in 2008. The increase in
China’s share of world exports in 2000 and 2008 at 5.1 percentage
points is slightly less than one half of the total increase in the share of

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developing countries over this period. Brazil and Russia, with higher
value of exports than India in absolute terms registered higher growth
rate than India in 2008 (Table 6.14).

Table: 6.14
Export Growth and Share in World Exports

Growth rate % Share in world exports (%)

CAGR Annual

2000- 2006 2007 2008 200 2006 2007 2008

05 0

China 25.0 27.2 25.6 17.3 3.9 8.0 8.8 9.1

Hong 7.5 9.5 8.7 5.3 3.2 2.6 2.5 2.3

Kong

Malaysia 7.5 14.0 9.6 19.1 1.5 1.3 1.3 1.3

Indonesia 5.9 19.0 14.7 24.4 1.0 0.9 0.9 0.9

Thailand 9.8 18.7 17.0 12.9 1.1 1.1 1.1 1.1

Singapor 10.8 18.4 10.1 13.0 2.2 2.2 2.2 2.1

e

India 18.6 21.3 20.3 20.7 0.7 1.0 1.1 1.1

Brazil 16.5 16.3 16.6 23.2 0.9 1.1 1.2 1.3

Mexico 5.2 17.1 8.6 7.3 2.6 2.1 2.0 1.8

Russia 18.2 24.7 16.9 44.3 1.7 2.5 2.6 3.2

Korea 10.5 14.4 14.1 13.6 2.7 2.7 2.7 2.7

Emer. & 16.5 22.7 14.7 21.1 26.0 36.0 36.2 38.4
Develop.
Eco
World
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World 10.4 16.0 13.9 14.3 100. 100.0 100.0 100.0
0

Source: Economic Survey, 2008-09.

Though India had a large overall trade deficit, it had a trade
surplus with United States, UAE, United King, Hong Kong, Belgium,
Italy and Brazil in 2007-08. During 2008-09 (April-Feb.), India had a
trade surplus with US, UK, Singapore, Brazil and Hong Kong with a
sharp decline in case of Hong Kong. The largest trade deficits were
with Saudi Arabia and China as indicated by the export/import ratio
shown in Table 6.16.

Table: 6.16
India's Trade and Export/Import Ratio with Major Trading Partners
S. Countries Share in Total Trade (per cent) Export/Import Ratioa
N.
200 200 2005- 2006- 2007- 2008- 2006 2007 2008-
3-04 4-05 06 07 08 09 -07 -08 09
(Apr.- (Apr.-
Feb) Feb)

1. China PRP 4.9 6.5 7.0 8.3 9.2 8.6 0.5 0.4 0.3

2. USA 11.6 10.6 10.6 9.8 10.1 8.2 1.6 1.0 1.2

3. UAE 5.1 6.1 5.1 6.6 7.0 8.1 1.4 1.2 1.0

4. Saudi 1.3 1.4 1.4 5.1 5.6 5.6 0.2 0.2 0.2
Arabia

5. Germany 3.8 3.5 3.8 3.7 3.6 3.6 0.5 0.5 0.6

6. Singapore 3.0 3.4 3.5 3.7 3.7 3.3 1.1 0.9 1.1

7. UK 4.4 3.7 3.6 3.1 2.8 2.6 1.3 1.4 1.0

8. Hong Kong 3.3 2.8 2.6 2.3 2.2 2.6 1.9 2.3 1.1

9. Korea RP 2.5 2.3 2.5 2.3 2.1 2.5 0.5 0.5 0.4

10 Japan 3.1 2.7 2.6 2.4 2.5 2.3 0.6 0.6 0.4
.

11 Belgium 4.1 3.6 3.0 2.4 2.1 2.2 0.8 1.0 0.8
.

12 Indonesia 2.3 2.0 1.7 2.0 1.7 2.0 0.5 0.4 0.4

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.

13 Italy 2.0 1.9 1.7 2.0 1.9 1.8 1.3 1.0 0.9
.

14 South Africa 1.7 1.6 1.6 1.5 1.5 1.6 0.9 0.7 0.3
.

15 France 1.7 1.8 2.5 2.0 2.1 1.3 0.5 0.4 0.9
.

16 Brazil 0.4 0.8 0.8 0.8 0.8 0.9 1.5 2.7 2.2
.

Total 55.3 55.0 54.1 58.1 58.9 57.1 0.8 0.7 0.6

Source: Computed from DGCI&S data.

Trade policy reforms initiated by India in the 1990s have

resulted in liberalization India’s trade with open door policy. The
reforms also led to the growth and structural changes in India’s trade
and effective management of balance of payment. The foreign
investment increased during the post-reform era while the
technological transfer and foreign capital accelerated the growth rate
of industrial and business development. There has been change in
consumer perception, attitude also due to changing business
environment and mass production unleashed by improved technology,
capital flow and trade liberalization.

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