Lecture 1 - India’s Foreign Trade | International Economics- In Depth Basics and Analysis PDF Download

 Page 1


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: India’s Foreign Trade 
Lesson Developers: Vaishali kapoor and Rakhi Arora 
College/Department: Delhi University 
 
 
Page 2


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: India’s Foreign Trade 
Lesson Developers: Vaishali kapoor and Rakhi Arora 
College/Department: Delhi University 
 
 
 
Table of Contents: 
1. Introduction 
2. Role of Foreign Trade 
3. India’s trade position an overview 
? Cross Country Comparison 
4. India’s trade composition 
? Exports 
? Imports 
5. Direction of Trade 
6. Summary 
7. Exercises 
8. Glossary 
9. References 
Learning Outcomes: 
After studying this chapter, a student should be able to:- 
1. Define foreign trade. 
2. Explain role of foreign trade in an economy. 
3. Make a comparative analysis of countries’ trade position. 
4. List items of India’s exports and imports 
5. Sketch trends in trade of specific/ important commodities. 
6. List India’s major trading partners. 
  
Page 3


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: India’s Foreign Trade 
Lesson Developers: Vaishali kapoor and Rakhi Arora 
College/Department: Delhi University 
 
 
 
Table of Contents: 
1. Introduction 
2. Role of Foreign Trade 
3. India’s trade position an overview 
? Cross Country Comparison 
4. India’s trade composition 
? Exports 
? Imports 
5. Direction of Trade 
6. Summary 
7. Exercises 
8. Glossary 
9. References 
Learning Outcomes: 
After studying this chapter, a student should be able to:- 
1. Define foreign trade. 
2. Explain role of foreign trade in an economy. 
3. Make a comparative analysis of countries’ trade position. 
4. List items of India’s exports and imports 
5. Sketch trends in trade of specific/ important commodities. 
6. List India’s major trading partners. 
  
 
 
Introduction 
 
Foreign trade refers to the exchange of goods and services and capital across nations.Gone 
are the days, when countries used to aim self –sufficiency. In actual, no country can be self-
sufficient. No country can produce all the goods and services that an economy requires.So, 
dependence on other economies is imperativewhen an economy can either not 
producevarious goods and services or is not available in sufficient quantities. At the same 
time, an economy can sell excess of some goods and services to other nations across globe. 
Countries have shifted from concept of self–sufficiency to self-reliance. 
 
Foreign trade not only fills in the gaps in demand of goods and services but also meets the 
requirement of capital in time of need. In the current phase of increasing globalization, 
foreign trade as percentage of GDP is increasing and as a growth driver it is becoming 
imperative. 
 
This chapter attempts to provide glimpse of India’s Foreign Trade. This chapter comprise of 
foursections. First section presents the role of foreign trade in an economy. In the second 
section trends in India’s foreign trade are discussed. Third section presents a brief 
description of major export and import items and changes in their relative importance. Last 
section covers direction of India’s trade with rest of the world. 
 
1. Role of Foreign Trade 
Foreign trade has an imperative role to play for an economy. 
 
(a) Foreign trade allows country to specialize in the production of goods and services in 
which that country has comparative advantage. So world’s recourses are utilized 
efficiently. 
 
(b) Trade provides larger variety/basket of goods for country’s consumers. 
 
(c) For a developing nation like India, foreign trade can become source of capital, 
knowledge, technology, innovation and expertise. 
 
(d) Since all firms within and across nation compete by vying their products, producing 
efficiently becomes the mandate for firms (to reduce cost). 
 
(e) Goods, which had high production costs, could be imported and these goods are 
provided at cheaper rates throughout the economy. 
 
(f) Excess supply or demand conditions-which could be large and persistent in absence 
of trade-can be smoothened and fluctuations are decreased. This also brings in price 
stability. 
 
(g) Surpluses of production can be sold in the foreign markets and foreign exchange 
could be earned. 
 
(h) Trade can promote employment and growth in the economy. 
Page 4


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: India’s Foreign Trade 
Lesson Developers: Vaishali kapoor and Rakhi Arora 
College/Department: Delhi University 
 
 
 
Table of Contents: 
1. Introduction 
2. Role of Foreign Trade 
3. India’s trade position an overview 
? Cross Country Comparison 
4. India’s trade composition 
? Exports 
? Imports 
5. Direction of Trade 
6. Summary 
7. Exercises 
8. Glossary 
9. References 
Learning Outcomes: 
After studying this chapter, a student should be able to:- 
1. Define foreign trade. 
2. Explain role of foreign trade in an economy. 
3. Make a comparative analysis of countries’ trade position. 
4. List items of India’s exports and imports 
5. Sketch trends in trade of specific/ important commodities. 
6. List India’s major trading partners. 
  
 
 
Introduction 
 
Foreign trade refers to the exchange of goods and services and capital across nations.Gone 
are the days, when countries used to aim self –sufficiency. In actual, no country can be self-
sufficient. No country can produce all the goods and services that an economy requires.So, 
dependence on other economies is imperativewhen an economy can either not 
producevarious goods and services or is not available in sufficient quantities. At the same 
time, an economy can sell excess of some goods and services to other nations across globe. 
Countries have shifted from concept of self–sufficiency to self-reliance. 
 
Foreign trade not only fills in the gaps in demand of goods and services but also meets the 
requirement of capital in time of need. In the current phase of increasing globalization, 
foreign trade as percentage of GDP is increasing and as a growth driver it is becoming 
imperative. 
 
This chapter attempts to provide glimpse of India’s Foreign Trade. This chapter comprise of 
foursections. First section presents the role of foreign trade in an economy. In the second 
section trends in India’s foreign trade are discussed. Third section presents a brief 
description of major export and import items and changes in their relative importance. Last 
section covers direction of India’s trade with rest of the world. 
 
1. Role of Foreign Trade 
Foreign trade has an imperative role to play for an economy. 
 
(a) Foreign trade allows country to specialize in the production of goods and services in 
which that country has comparative advantage. So world’s recourses are utilized 
efficiently. 
 
(b) Trade provides larger variety/basket of goods for country’s consumers. 
 
(c) For a developing nation like India, foreign trade can become source of capital, 
knowledge, technology, innovation and expertise. 
 
(d) Since all firms within and across nation compete by vying their products, producing 
efficiently becomes the mandate for firms (to reduce cost). 
 
(e) Goods, which had high production costs, could be imported and these goods are 
provided at cheaper rates throughout the economy. 
 
(f) Excess supply or demand conditions-which could be large and persistent in absence 
of trade-can be smoothened and fluctuations are decreased. This also brings in price 
stability. 
 
(g) Surpluses of production can be sold in the foreign markets and foreign exchange 
could be earned. 
 
(h) Trade can promote employment and growth in the economy. 
 
 
 
2. India's Trade position: An overview 
 
At the inception of planning in 1951, India’s share in total world exports was 1.91 percent 
(in 1950).Which declined to 0.53 percent in 1992.The reason for such a decline was 
ISI(import substitution industrialization) rolling proposed by Mahalanobis in 1956 and 
inward looking policies were provided impetus due to the emergence of concept of self –
sufficient economy and this was further sustained by existence of vast domestic market. But 
this resulted in inefficiencies in production, high cost of production and technological gap. In 
1970s, the attitude towards exports and imports changed and major reforms were initiated 
in 1991 after the outbreak of Balance of Payment (BOP) crisis. 
 
 
Cross-Country comparison 
 
Table 1: Countries profile for Merchandise Trade 
 
Countries Annual percentage change 
(2005-2012) 
Import                     Export 
Share in world 
total 
export(2012) 
Share in world 
total 
import(2012) 
EU(27) 07 07 14.67 15.37 
USA  08 08.4 12.55 
HONGKONG 09 08 02.68 02.97 
CHINA 16 15 11.13 09.77 
INDIA 19 17 01.61 02.63 
MALAYSIA 08 07 01.24 01.06 
SINGAPORE 10 09 02.22 02.24 
Source: WTO statistics 
 
Table 1 presents a clear picture about merchandise trade’s growth is various countries and 
also deposits various countries share in world exports & imports.  For the period 2005-2012, 
India recorded highest growth is both exports & imports, followed by china.  Looking at the 
share of exports, EU (27) topped the list with 14.67% followed by china (11.37%) & then 
USA 8.64 % India will log behind this list, with only 1.61% contribution towards world 
exports.  For share in world imports top 3 countries are same with little changes inrankings, 
starting with EU (27), USA & then China. 
 
India recorded a surge in growth rate of exports during 2005-2012 but at the same time 
imports growth rate of 19% still exceeded export’s growth rate of 17%. This could be 
burdensome for an economy. 
 
As could be observed in Fig.1 that India’s trade balance has always been in negative zone 
and rising since 1970-71. 
 
 
 
 
 
Page 5


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Lesson: India’s Foreign Trade 
Lesson Developers: Vaishali kapoor and Rakhi Arora 
College/Department: Delhi University 
 
 
 
Table of Contents: 
1. Introduction 
2. Role of Foreign Trade 
3. India’s trade position an overview 
? Cross Country Comparison 
4. India’s trade composition 
? Exports 
? Imports 
5. Direction of Trade 
6. Summary 
7. Exercises 
8. Glossary 
9. References 
Learning Outcomes: 
After studying this chapter, a student should be able to:- 
1. Define foreign trade. 
2. Explain role of foreign trade in an economy. 
3. Make a comparative analysis of countries’ trade position. 
4. List items of India’s exports and imports 
5. Sketch trends in trade of specific/ important commodities. 
6. List India’s major trading partners. 
  
 
 
Introduction 
 
Foreign trade refers to the exchange of goods and services and capital across nations.Gone 
are the days, when countries used to aim self –sufficiency. In actual, no country can be self-
sufficient. No country can produce all the goods and services that an economy requires.So, 
dependence on other economies is imperativewhen an economy can either not 
producevarious goods and services or is not available in sufficient quantities. At the same 
time, an economy can sell excess of some goods and services to other nations across globe. 
Countries have shifted from concept of self–sufficiency to self-reliance. 
 
Foreign trade not only fills in the gaps in demand of goods and services but also meets the 
requirement of capital in time of need. In the current phase of increasing globalization, 
foreign trade as percentage of GDP is increasing and as a growth driver it is becoming 
imperative. 
 
This chapter attempts to provide glimpse of India’s Foreign Trade. This chapter comprise of 
foursections. First section presents the role of foreign trade in an economy. In the second 
section trends in India’s foreign trade are discussed. Third section presents a brief 
description of major export and import items and changes in their relative importance. Last 
section covers direction of India’s trade with rest of the world. 
 
1. Role of Foreign Trade 
Foreign trade has an imperative role to play for an economy. 
 
(a) Foreign trade allows country to specialize in the production of goods and services in 
which that country has comparative advantage. So world’s recourses are utilized 
efficiently. 
 
(b) Trade provides larger variety/basket of goods for country’s consumers. 
 
(c) For a developing nation like India, foreign trade can become source of capital, 
knowledge, technology, innovation and expertise. 
 
(d) Since all firms within and across nation compete by vying their products, producing 
efficiently becomes the mandate for firms (to reduce cost). 
 
(e) Goods, which had high production costs, could be imported and these goods are 
provided at cheaper rates throughout the economy. 
 
(f) Excess supply or demand conditions-which could be large and persistent in absence 
of trade-can be smoothened and fluctuations are decreased. This also brings in price 
stability. 
 
(g) Surpluses of production can be sold in the foreign markets and foreign exchange 
could be earned. 
 
(h) Trade can promote employment and growth in the economy. 
 
 
 
2. India's Trade position: An overview 
 
At the inception of planning in 1951, India’s share in total world exports was 1.91 percent 
(in 1950).Which declined to 0.53 percent in 1992.The reason for such a decline was 
ISI(import substitution industrialization) rolling proposed by Mahalanobis in 1956 and 
inward looking policies were provided impetus due to the emergence of concept of self –
sufficient economy and this was further sustained by existence of vast domestic market. But 
this resulted in inefficiencies in production, high cost of production and technological gap. In 
1970s, the attitude towards exports and imports changed and major reforms were initiated 
in 1991 after the outbreak of Balance of Payment (BOP) crisis. 
 
 
Cross-Country comparison 
 
Table 1: Countries profile for Merchandise Trade 
 
Countries Annual percentage change 
(2005-2012) 
Import                     Export 
Share in world 
total 
export(2012) 
Share in world 
total 
import(2012) 
EU(27) 07 07 14.67 15.37 
USA  08 08.4 12.55 
HONGKONG 09 08 02.68 02.97 
CHINA 16 15 11.13 09.77 
INDIA 19 17 01.61 02.63 
MALAYSIA 08 07 01.24 01.06 
SINGAPORE 10 09 02.22 02.24 
Source: WTO statistics 
 
Table 1 presents a clear picture about merchandise trade’s growth is various countries and 
also deposits various countries share in world exports & imports.  For the period 2005-2012, 
India recorded highest growth is both exports & imports, followed by china.  Looking at the 
share of exports, EU (27) topped the list with 14.67% followed by china (11.37%) & then 
USA 8.64 % India will log behind this list, with only 1.61% contribution towards world 
exports.  For share in world imports top 3 countries are same with little changes inrankings, 
starting with EU (27), USA & then China. 
 
India recorded a surge in growth rate of exports during 2005-2012 but at the same time 
imports growth rate of 19% still exceeded export’s growth rate of 17%. This could be 
burdensome for an economy. 
 
As could be observed in Fig.1 that India’s trade balance has always been in negative zone 
and rising since 1970-71. 
 
 
 
 
 
 
 
 
Figure 1: India’s Trade Balance 
 
 
3. India’s trade composition 
 
India imports oil, sugar, metals, paper, rubber, medicines, capital goods etc among others 
and exports tea, spices, cotton, fruits& Vegetables, leather, chemicals etc. among others. 
Trade balance shows the difference between these imports and exports. 
 
In 1970-71, total import were of Rs 16.34 billion, import to GDP ratio being 3.9 vis-à-vis 
total exports were of Rs 15.35 billion, export to GDP ratio being 3.1. Here, as imports are 
more than exports, the trade deficit is Rs .99 billion. 
Figure 2: Exports and Imports of India 
 
Source: RBI statistics 
-12000.00
-10000.00
-8000.00
-6000.00
-4000.00
-2000.00
0.00
2000.00
1970-71   
1973-74   
1976-77   
1979-80   
1982-83   
1985-86   
1988-89   
1991-92   
1994-95   
1997-98   
2000-01   
2003-04   
2006-07   
2009-10   
2012-13   
Trade Balance (Rs. Billions)
Year
Rising India's trade Balance from 1970-71 to 2012-13
Trade Balance
0.00
5000.00
10000.00
15000.00
20000.00
25000.00
30000.00
2000-01   
2001-02   
2002-03   
2003-04   
2004-05   
2005-06   
2006-07   
2007-08   
2008-09   
2009-10   
2010-11   
2011-12   
2012-13   
2013-14   
Exports(Rs. Billion)
Imports(Rs.Billion