Category: Management Notes

Prior to British rule, India was famous in the world for its exportable items, which were bused on cottage and small scale industries. But during the British period India was forced to change its pattern of trade, exporting only the raw materials for British industries and importing the final products to provide a market of the English industries.

Before the Second World War, India was bound to export more than its import, in order to meet the unilateral transfer payments in the shape of salaries and pensions for British officials in India, resulting in a favourable balance of trade position. The direction of trade was pointed towards U.K. amounting 31 per cent of India’s total import during 1938-39. However a considerable change in the composition, pattern and direction of trade took place during the planning era, though the deficit in the balance of payment account is increasingly is becoming high.

Foreign Trade during Plan Periods

The First Plan

During the First Plan, the deficit in the balance of payment was worked out to be Rs 108 crores per annum. This was basically due to the import of developmental capital goods. However, there was no change in the export side during the plan period.

The Second Plan (1956-57-60-61)

The import of the country increased significantly during the 2nd plan period, as there was a change in the very structure of the economy. Due to the implementation of the Mohalanobis model, huge investment was to be made on basic and key industries.

Foreign technology, technical know-how and concessional capital constituted the main items of India’s import. Further to meet the internal shortage, enough amounts of food grains had to be imported. The export during the period also slowed down and the much needed diversification of export and export-promotion did not materialise. There was an acute shortage of foreign exchange due to the unfavorable balance of payment situation.

The Third Plan (1961-62-65-66)

During the 3rd plan period, the average import of the country was at Rs 1,224 crores, while the corresponding import was only Rs. 747 crores, resulting in a huge trade deficit. The basic reason for this situation is the need for higher import for our materials and industrial and technical know-how and food grains during the period.

Devaluation of 1966 and period up to 1973-74

Due to a continuous adverse balance of payment situation since 1951, acute foreign exchange position, growing international borrowing from abroad, India was compelled to devaluate the value of Rupee by 36.5 per cent in June 1966. Due to failure of agriculture, import of food grains became necessary which resulted in a further trade deficit.

However, due to favourable agriculture and reduction of food grain import, along with import restriction and export promotion measures, during 1972-73, the country was able to have a favourable balance of trade position. But in the next year, due to increase in the price of petroleum products, chemical fertilizer and newsprint in the global market again the deficit cropped up. However, the magnitude of deficit during 4th plan period was less than its earlier period.

The Fifth Plan (1974-75)

The value of imports during this period touched a very high level due to increase in prices of petroleum products, fertilizer and food grains. Export during the period also increased significantly, in fish, fish preparations, coffee, groundnuts, tea, cotton fabrics and ready-made garments. During 1976-77, the country experienced a trade surplus.

However during 1977-78 and in the next two years due to a unsystematic liberal import policy, along with stagnant export, the balance of trade became negative.

The Sixth and Seventh Plan

Due to a further increase in the price of petroleum products, the import bill increased from Rs. 6,814 crores in 1978-79 to Rs.13, 608 crores in 1981-82. The outcome was unprecedented trade deficit, though the export increased considerably during the period. The average annual import during the 7th Plan was Rs 28,874 crores but export average stood up at Rs. 18,033 crores. The trade deficit compelled the Govt. to borrow Rs. 6.7 billions from World Bank and IMF.

Foreign trade from 1989-90 to 93-94

In spite of a rise in exports, trade deficit shot up to a high figure of Rs. 10,635 crores due to increase in import value as an outcome of Gulf War. During 1991-92, the Govt. went for drastic import reduction and took many policies to increase export. But export in dollar-term did not rise. This was mainly due to the decline in export to Rupee Payment Area (RPA) by 42.5% in dollar terms during 1991-92. During 1991-93, trade-deficit further worsened. The import of oil rose by 13.5%. The disintegration of USSR resulted in an export decline. However, the exports to General Currency Area (GCA) rose by 10.4% in 1992-93, but in RPA it further declined. During 1993-94, export promotion measures, export increased by 19.6%, while the import increased by 6.1%. This resulted in a decline in trade deficit, which requires further to be sustained over a long period of time. The main features of foreign trade are as follows:

(1) Growing value of trade,

(2) Large growth of import,

(3) Inadequate expansion of exports.

(4) Resulting widening trade deficit.

1. Huge Growth in the Value of Trade

Table 7.1 reveals that the total value of foreign trade which was Rs. 1,972 crore in 1950-51, gradually increased to Rs. 2,835 crore in 1960-61 and then to Rs. 3,487 crore in 1965-66. After that the value of trade increased at a quicker pace from Rs. 3,169 crore in 1970-71 to Rs. 9,301 crore in 1975.-76 and then rose significantly to Rs. 19,260 crore in 1980- 81.

Thereafter, the total value of trade rose significantly to Rs. 30,553 crore in 1985-86 to Rs. 63,097 crore in 1989-90 and to Rs. 91,893 crore in 1991-92 and then to Rs. 1,17,063 crore in 1992-93 and finally to Rs. 22.15,191 crore in 2008-09.

Thus during the period from 1950-51 to 1970-71 total value of trade rose by only 60.9 percent. Again during the period 1970-71 to 1980-81, total value of foreign trade rose significantly by 597 per cent, i.e., by nearly 6 times. But during the period 1980-81 to 1990-91, total value of trade rose by 293.3 per cent, i.e., by nearly 4 times. In 2008-09 the value of trade recorded an increase of 32.79 per cent over the previous year.

2. Higher Growth of Imports

Another peculiarity that can be seen from this trend is that there has been consequential higher growth in respect of imports of the country since 1951. Thus the total value of imports which was Rs. 1,025 crore in 1950-51 gradually rose to Rs. 1,634 crore in 1970- 71, i.e., by only 59 per cent. Since then the value of imports started to rise at a very faster pace and thus reached the level of Rs. 12,549 crore in 1980-81 and then to Rs. 43,193 crore in 1990-91 showing an increase of 667 per cent and 244 per cent during the last two decades respectively.

The factors which were largely responsible for this phenomenal increase in imports include: huge import of industrial inputs, regular import of food grains under P.L. 480 rising anti-inflationary imports, liberal imports of non-essential items, periodic hike on oil prices and the initiation of liberal import policy by the government during 1985-86 to 1991-92. In 2008-09, the value of imports rose significantly to Rs. 13,74,436 crore, showing a growth rate of 33.77 per cent over the previous year.

3. Inadequate Growth of Exports

Another very peculiar situation that the country has been facing is a very slow growth in respect of its exports. In the initial period, total value of exports in India rose marginally from Rs. 947 crore in 1950-51 to Rs. 1,535 crore in 1970-71, showing an increase of only 62 per cent. But since then the growth of exports in the country could not keep pace with the growth in imports.

Total value of exports rose gradually to Rs. 6,711 crore in 1980-81 showing an increase of 337 per cent over 1970-71 and then to Rs. 32,553 crore in 1990-91, showing an increase of 385 per cent over the value of 1980-81. In 1993-94, the value of exports rose considerably to Rs. 69,751 crore showing a growth of 29.9 per cent over the previous year.

In 2008-2009, the value of exports rose to Rs. 8,40,755 crore showing a growth rate of 28.2 per cent over the previous year. Again in 2009-2010 (Apr.-Jan.) the value of exports stood at Rs. 3,72,096 crore showing a negative growth of 19.9 per cent over the previous year. Due to the introduction of various export promotion measures since the devaluation of rupee in 1966, the value of Indian exports recorded some increase but this increase in exports was totally inadequate considering the sizeable growth in the value of imports.

This has resulted in a persistent and widening trade deficit in the country. The factors which were mostly responsible for this low growth of exports include un-favourable terms of trade for Indian primary (agro-based) goods, inadequate export surplus, adoption of the policy of protectionism by developed countries and long period of business recession in developed country in recent years.

Reasons of Slow Export growth

Survey Findings. Recently a survey conducted by the Delhi School of Business on 150 export organizations revealed that the main reasons for the slow growth of exports in India were that 65 per cent of the export establishments were not using ITPO, MMTC and other such institutions.

Moreover, a majority of the establishments were not inclined to make use of training and education in international marketing. Clearly, lack of adequate professionally trained manpower in export organizations is one of the important reasons for slow growth of exports in the country and failure to compete effectively in global markets.

Some of the important factors which were found responsible for reduction in growth of exports from 20 per cent to a mere four per cent during the last two years (1996-98) were Government policies, quality of production, tariffs, quality control and management, institutional finance, banks, export procedures and participation in trade fairs.

It was also observed that as many as 47 per cent of the exporters would not like to avail of the services of personnel trained in export and would manage their operations through family members or others not professionally trained. The study also highlighted an attitudinal disinclination towards professionalism. Thereby, as many as 56 per cent of the respondents were not inclined to sponsor a candidate for training international marketing.

As per this survey, the most dominant constraints and problems faced by the exporters were lack of export marketing information, inadequate infrastructural facilities, procedural complications, monetary loss due to low export prices and delay in clearance in ports. Therefore, immediate improve­ment or upgrading was required in port handling facilities, road transportation, rail transport and power sectors.

Regarding shipments, the biggest constraints were high incidence of warehousing cost, delay in customs clearance, inadequate warehousing facilities, low frequency of sailing, high incidence of port expenses and inadequate shipping space.

It is quite disturbing to note that India’s share in world trade was 1.78 per cent in 1950 and in-spite of all the efforts made it has come down to 0.61 per cent in 1994. Immediately after liberalization, there were positive signs up to 1995 but in 1996 and 1997 there had been a reversal of the trend. But during the current period, i.e., in 2001-02 and 2002-03, the export has recorded a growth rate of 19.7 per cent respectively. In-spite of the constraints and inadequacies faced by the exporters it was heartening to note that the exporting community, as observed by the survey, was optimistic about the future scenario.

4. Mounting Trade Deficit: Deficit in the Balance of Trade

As a result of higher growth of imports and slow growth of exports the country has been experiencing a mounting trade deficit since 1980-81. During the last 45 years period, the country has recorded a small surplus in its trade only in two years (viz., in 1972-73 and in 1976-77).

Due to adverse balance of trade situation, the extent of trade deficit in India gradually rose from Rs. 78 crore in 1950-51 to Rs. 949 crores in 1965-66. Recording a decline to Rs. 99 crore in 1970-71, the extent of trade deficit rose from Rs. 1,229 crore in 1975-76 to Rs. 5,838 crore in 1980-81 and then considerably to Rs. 10,640 crores in 1990-91. But after the introduction of some changes in the trade policy and due to considerable import compression the extent of trade deficit declined remarkably to Rs. 3,809 crore in 1991-92.

Accordingly, the annual average deficit in balance of trade which was Rs. 108 cu.re during the First Plan gradually rose to Rs 747 crore during the Third Plan. But due to import compression and boosting exports, the annual average trade deficit declined to Rs. 167 crore during the Fourth Plan. But since then the annual average deficit in balance of trade rose significantly from Rs. 810 crore during the Fifth Plan to Rs. 5,716 crore during the Sixth Plan and then to Rs. 7,720 crore during the Seventh Plan.

In 1992- 93 the extent of trade deficit again rose to Rs. 9,687 crore due to huge increase in import. But during 1993-94, the extent of trade deficit declined to Rs. 3,350 crore due to considerable increase in exports. But during 2008-2009, the extent of trade deficit again rose to Rs. 5,33,681 crore. Again during 2009- 2010, the extent of trade deficit further rose to Rs. 2,31,110 crore (April-Sept.).

The composition of foreign trade is an important indicator of the pattern of trade developed by country. By the term composition of trade we mean the structural analysis involving the various types and the volume of various items of exports and imports of the country.

The composition of foreign trade of a country reflects on the diversification and specialization attained in its productive structure along with its rate of progress and structural changes. The country exporting more of primary products, viz., raw materials and importing finished manufacturing goods and capital goods can be branded as an underdeveloped country. With the passage of time a country attempts to change the pattern of trade in such a manner so that it can attain a better term of trade for its products by transforming the country from a primary producing one to a producer of finished manufactured products.

COMPOSITION OF EXPORTS IN INDIA

At the dawn of independence, the export basket of the country was mostly consisting of jute, tea and cotton textiles, which jointly contributed more than 50 per cent of the total exports earning of the country. In 1950-51, these three commodities contributed about 60 per cent of the total export earnings of the country. But this export of primary products is always disadvantageous as the terms of trade always goes against the exporter country in this respect due to its inelastic demand in international markets.

With the gradual diversification and growth of the industrial sector, India started to export various types of non-traditional products. Accordingly the share of jute, tea and cotton textiles in the total export earning of the country gradually declined to 31 per cent in 1970-71 and then considerably to 2.73 per cent in 2008-2009. But the share of machinery and engineering goods in India’s total export increased gradually from a mere 2.1 per cent in 1960-61 to 12.9 per cent in 1970-71 and stood at 25.8 per cent in 2008-2009.

Table shows the changes in the composition of export in India:

(i) Jute was one of the most important export items initially and contributed Rs. 213 crore, i.e., about 20 per cent of the total export earnings. But its share gradually declined to 12.4 per cent in 1970-71 and then to only 0.16 per cent in 2008-09.

(ii) Tea was second most important item of export which contributed Rs. 187 crore (18.7 per cent of total export earnings) in 1960-61. Its share declined gradually to 9.6 per cent in 1970-71 and then to 3.3 per cent in 1990-91 and about 0.31 per cent in 2008-2009.

(iii) The share of cotton fabrics in total export earning of the country also declined marginally from 8.7 per cent in 1960-61 to 6.4 per cent in 1990-91 and 2.25 per cent in 2008-09.

(iv) Export of handicrafts rose considerably from a mere Rs. 73 crore in 1970-71 to Rs. 1,33,465 crore in 2008-09 which constituted about 15.8 per cent of total export earning in 2008-09 and occupied third place.

(v) Export of readymade garments has also increased considerably from Rs. 29 crore in 1970- 71 to Rs. 50,294 crores in 2008-09 which constituted nearly 5.98 per cent of total export earnings in 2008-09 and occupied fourth place.

(vi) Exports of machinery and engineering goods rose substantially from a mere Rs. 22 crore in 1960-61 to Rs. 2,16,856 crore in 2008-09, which constituted about 25.8 per cent of total earning in 2008-2009. It occupied first place.

Moreover, in recent years (2008-09) the exports of some other articles also increased considerably which include leather and leather manufactures (Rs. 15,931 crore—5th place), chemicals and allied products (Rs. 85,697 crore—4th place), iron ore (Rs. 21,725 crore) etc.

Again the exports of the country have been broadly classified into five groups:

(i) Agriculture and allied products

(ii) Ores and minerals

(iii) Manufactured goods

(iv) Mineral fuels and lubricants

(v) others

The table shows that in 1970-71 total value of export was Rs. 1,535 crore and the share of the above five groups was 31.7 per cent, 10.7 per cent, 50.2 per cent, 0.84 per cent and 6.5 per cent respectively. Again in 2008-2009, the share of these five groups in the country’s export trade changed to 9.2 per cent, 4.2 per cent, 67.6 per cent, 15.1 per cent and 4.03 per cent respectively

THE DIRECTION OF EXPORT OR INDIA’S FOREIGN TRADE

Direction of foreign trade means the countries to which India exports its goods and the countries from which it imports. Thus direction consists of destination of exports and sources of our imports. Prior to our Independence when India was under British rule, much of our trade was done with Britain.

Therefore, UK used to hold the first position in India’s foreign trade. However, after Independence, new trade relationships were established. Now USA has emerged as the most important trading partner followed by Germany, Japan and UK. India is also making efforts to increase the exports to other countries also the direction of India’s exports and imports.

Share of major destinations of India’s exports and sources of imports during 2009-10 (April-September) are given in figure respectively:

During the period 2009-10 (April-September), the share of Asia and ASEAN region comprising South Asia, East Asia, Mid-Eastern and Gulf countries accounted for 55.0 per cent of India’s total exports. The share of Europe and America in India’s exports stood at 21.4 per cent and 15.3 per cent respectively of which EU countries (27) comprises 20.0 per cent. During the period United Arab Emirates (14.4 per cent) has been the most important country of export destination followed by U.S.A. (11.5 per cent), China (5.1 per cent), Hong Kong (4.5 per cent), Singapore (4.3 per cent), Netherlands (3.7 per cent), U.K. (3.7 per cent), Germany (3.1 per cent), Saudi Arabia (2.7 per cent) and Belgium (2.1 per cent).

FUTURE PROSPECTS OF TRADE

(1) Open International Rules

In the most optimistic scenario, countries come together to cooperate, and trade flows move easily across borders. Major economies jointly commit to address points of conflict and collaborate to revitalize the WTO through ‘plurilateral’ negotiations, with significant contributions from both advanced and larger emerging economies. The global agenda is daunting but action is taken on major issues: modernizing trade rules; minimizing distortions created by unfair subsidies; governing digital trade; addressing unresolved issues in agriculture and services; strengthening the WTO’s monitoring and dispute settlement functions.

Public and private stakeholders also collaborate to strengthen mechanisms for investment governance across different international platforms. Likewise, trade policymakers build cooperative mechanisms with other policy communities on relevant issues such as data flows, cybersecurity and the environment, laying coherent global governance foundations for innovation, growth and productivity gains.

(2) Competing coalitions

Here, countries cooperate, but much of it is shaped by emerging deep structural rifts over the role of the state in governing data flows, investment and advanced industrial technology that holds national security applications. Amidst these differences, trade and investment flows are directed by political intervention rather than price signals, and pressure comes to bear on multinationals to restructure and localize value chains.

It becomes impossible to make progress within the WTO and multilateral governance is supplanted by closed regional blocs. Heightened concerns over the geopolitical and security implications of investment result in the bifurcation of investment flows (China versus the US, the EU and Japan). The movement of information across borders is also subject to divergent governance regimes.

Some regions – such as sub-Saharan Africa, South-East Asia and Latin America – and global businesses become caught in between different spheres of influence. In a zero-sum dynamic, individual countries come under pressure to lean towards one bloc over another, with negative repercussions for geopolitical stability, economic development and global governance.

(3) Technological Disruption

In the third scenario, countries act unilaterally rather than cooperatively, but technological innovation races ahead of regulation. A borderless world is created for some, while others face wide-spread uncertainty and inefficiencies. Firm-led disruption creates pockets of radical innovation with the potential for winner-take-all profits. Small and medium sized enterprises, however, may become disadvantaged by high barriers to entry in some technologies and greater fragmentation in the global economy.

While first-mover benefits in any given industry might be out-sized, these advantages combined with the lack of strong global intellectual property (IP) protection norms generates incentives for theft and other forms of economic espionage. Fragmented regulatory frameworks for data flow governance raise cyber security risks and costs.

Investment flows that are dependent on long-term predictability are likely to be dampened. Small businesses and consumers in weaker economies might lose access to the latest technologies and services. Conflict between governments may also increase. Without multilateral options for rules-based dispute resolution, differences will be settled on power considerations, generating yet more uncertainty and higher business costs.

(4) Sovereignty First

In this worst-case scenario, unilateral action and a high frequency of economic conflict leads to a normalization of trade wars between major economies. Trade and investment issues become political weapons in broader geopolitical competition. The uncertainty and instability associated with entrenched economic conflict drains investment flows and business confidence. Without investment and facing high barriers to knowledge exchange, firms cannot innovate. Deep disruptions occur in global value chains, potentially leading to reshoring or deglobalization.

The global economy slides into protracted decline not seen since the Great Depression, creating major domestic challenges for most countries. These challenges include higher costs for consumers and rising unemployment, as well as domestic unrest. As major powers turn inwards to deal with domestic crises, populist and protectionist sentiments drive up the risks of international conflict. Limited options for orderly dispute resolution at the international level deepen the risks of long-lasting economic decline.

While these scenarios have been drawn in stark terms to sharpen the risks and trade-offs involved, there is an urgent need to reflect on potential consequences in each. We need global leadership to stop a potential slide into a global economic downturn that might take generations to recover from.

Composition

Just at the dawn of independence, the import basket of India was mostly consisting of grains, pulses, oils, machineries, hardware’s, chemicals, drugs, dyes, yarns, paper, non-ferrous metals, vehicles etc. With the introduction of planning and with its emphasis on the development of basic, capital goods and engineering industries, the country had to import a huge quantity of capital equipment’s along with its spares known as maintenance imports.

The following table shows the changes in the composition of imports in India since 1960-61

The above table reveals that for better analysis, the imports of the country have been broadly divided into four groups:

(i) Food and live animals chiefly for food

(ii) Raw materials and intermediate manufactures

(iii) Capital goods and

(iv) Other goods

The table further shows that in 1960-61 total value of imports was Rs. 1,795 crore consisting of the share of above four groups as Rs. 286 crore (15.9 per cent), Rs. 776 crores (43.2 percent), Rs. 560 crore (31.2 per cent) and Rs. 173 crore (9.7 per cent) respectively.

Again in 1970-71, total value of imports of the country was Rs. 1,634 crore and the share of the above four groups was 14.8 per cent, 54.3 per cent, 24.7 per cent and 6.2 per cent respectively. After 1970-71 total import bill of the country increased substantially due to a considerable hike in oil price by OPEC in 1973-74 and again in 1978-79.

The OPEC raised the prices of oil from $ 2.50 per barrel to $ 3 per barrel in 1973 and to 11.65 per barrel in 1974 and again $ 13.00 per barrel in 1978 and $ 35 per barrel in 1979. Due to this steep hike in the price of oil, total import bill of the country in 1980-81 increased sharply to Rs. 12,549 crore out of which expenditure on petroleum oil and lubricants (POL) only was Rs. 5,264 crore, i.e., 42 per cent of the total.

During the 1970s, POL imports recorded a considerable increase of about 44.2 per cent per annum as compared to that of 23.4 per cent per annum for all imports. Besides POL, higher rate of growth of imports was recorded by pearls, precious and semi-precious stones, fertilizers, iron and steel and capital goods in order of value during 1970s.

During 1980s, due to the introduction of import liberalization policy by the government, import bill of the country rose considerably to Rs. 19,658 crore in 1985-86 and to Rs. 43,193 crore in 1990- 91 and then finally to Rs. 1,22,698 crore in 1992-93. Although there was a slight fall on the import bill on POL in 1985-86 but since 1987-88, import of POL both in terms of quantity and value started to rise.

Total import of POL increased from 25.6 million tonnes in 1989-90 to about 29.3 million tonnes in 1990-91 and the total import bill on POL rose sharply to Rs. 10,816 crore in 1990-91. In 2008-2009 total import bill of the country rose to Rs. 13,74,476 crore and the bill on import of POL rose sharply to Rs. 4,19,946 crore.

Following are some of the important information about the compositions of Indian imports:

(a) Import expenditure on POL rose significantly from Rs. 136 crore in 1970-71 and then to Rs. 4,19,946 crore in 2008-09. Official projections say that imports of POL will further go up in the coming year since the demand for petroleum products is expected to grow from 57 million tonnes in 1992-93 to about 100 million tonnes in 2000-01 and to about 150 million tonnes by 2010-2011 A.D.

(b) Imports of different types of capital goods also rose significantly from Rs. 404 crore in 1970-71 to Rs. 2,16,511 crore in 2008-09 which amounted to about 15.7 per cent of total import in 2008-09.

(c) Import bill on pearls, precious and semi-precious stones also rose considerably from Rs. 25 crore in 1970-71 to Rs. 76,130 crore in 2008-09 and it amounted to nearly 5.5 per cent of total import in 2008-09.

(d) Import bill on fertilizer and fertilizer materials also rose considerably from Rs. 86 crore in 1970-71 to Rs. 59,569 crore in 2008-09 and amounted to nearly 4.33 per cent of the total imports in 2008-2009.

(e) Import bill on iron and steel rose considerably from Rs. 197 crore in 1960-61 to Rs. 45,531 crore in 2008-2009 and amounted to over 3.16 per cent of total imports in 2008-09.

Moreover, some other items which have been imported in India at low scale in recent years include food-grains and edible oil.

DIRECTION OF IMPORT

Direction of India’s imports has changed remarkably in the mean time. The table  shows the changes in the direction of India’s imports since 1960-61.

Table shows that direction of India’s imports. If we study block wise, then it can be seen that among the five blocks (i.e., OECD, OPEC, Eastern Europe, Developing countries and other countries) although the share of OECD countries in India’s imports was all along higher, but the same share gradually declined from 78 per cent in 1960-61 to 37.8 per cent in 2003-2004.

The share of OPEC in India’s total imports gradually increased from 4.6 per cent in 1960-61 to 7.2 per cent in 2003-2004. The share of Eastern European countries in India’s imports which was only 3.4 per cent in 1960-61, gradually rose to 13.5 per cent in 1970-71 but since then its share gradually declined to 1.6 per cent in 2003-2004.

The share of developing countries in India’s imports gradually rose from 12 per cent in 1960-61 to 18.4 per cent in 1990-91 and stood at 20.1 per cent in 2003-2004. The share of other countries in India’s imports also gradually increased from 2.0 per cent in 1960-61 to 33.3 per cent in 2003-2004.

Now if we look at country wise figures then it can be seen that the share of U.K. in India’s imports which was 20.8 per cent (135 crore) being the highest among all the countries, gradually declined to 8 per cent in 1970-71 and then to only 4.1 per cent in 200.3-2004. The share of USA in India’s imports although remained all along highest since 1960-61 its share gradually increased initially from 18 per cent in 1950-51 to 29 per cent in 1960-61 and since then the share gradually declined to 0.4 per cent in 2003-2004.

Thus, it is found that since 1970-71 direction of trade recorded a continuous change where India’s dependence for imports from USA and U.K. gradually declined with the opening and expansion of trading relations with other countries like USSR, Japan, Germany, Belgium, Saudi Arabia etc.

Another important trend that can be seen is that since 1960-61 India’s trading relations with socialist countries particularly with USSR was expanded. Accordingly, the share of U.S.S.R. in India’s imports which was only 1.4 per cent (Rs. 16crore) in 1960-61 gradually rose to 8.2 per cent (Rs. 1.014 crore) in 1980-81 and thus occupied third place.

Again in 1984-85, the share of USSR rose to 10.4 per cent and thus occupied first place in India’s imports. But the share of former USSR in India’s imports gradually declined to 6.0 per cent in 1990-91 and then to only 1.2 per cent in 2003-2004. In recent years, (i.e., 2003-2004) the other countries which have occupied a good share in India’s imports include Germany (3.7 per cent), Japan (3.4 per cent), Saudi Arabia, (0.9 per cent), Belgium (5.1 per cent), France (1.4 per cent) etc.

Free trade is a largely theoretical policy under which governments impose absolutely no tariffs, taxes, or duties on imports, or quotas on exports. In this sense, free trade is the opposite of protectionism, a defensive trade policy intended to eliminate the possibility of foreign competition. 

In reality, however, governments with generally free-trade policies still impose some measures to control imports and exports. Like the United States, most industrialized nations negotiate “free trade agreements,” or FTAs with other nations which determine the tariffs, duties, and subsidies the countries can impose on their imports and exports. For example, the North American Free Trade Agreement (NAFTA), between the United States, Canada, and Mexico is one of the best-known FTAs. Now common in international trade, FTA’s rarely result in pure, unrestricted free trade.

In 1948, the United States along with more than 100 other countries agreed to the General Agreement on Tariffs and Trade (GATT), a pact that reduced tariffs and other barriers to trade between the signatory countries. In 1995, GATT was replaced by the World Trade Organization (WTO). Today, 164 countries, accounting for 98% of all world trade belong to the WTO.

Despite their participation in FTAs and global trade organizations like the WTO, most governments still impose some protectionist-like trade restrictions such as tariffs and subsidies to protect local employment. For example, the so-called “Chicken Tax,” a 25% tariff on certain imported cars, light trucks, and vans imposed by President Lyndon Johnson in 1963 to protect U.S. automakers remains in effect today.

Arguments for Free Trade

(i) Advantages of specialisation

Firstly, free trade secures all the advantages of inter­national division of labour. Each country will specialise in the production of those goods in which it has a comparative advantage over its trading partners. This will lead to the optimum and efficient utilisation of resources and, hence, economy in production.

(ii) All-round prosperity

Secondly, because of unrestricted trade, global output increases since specialisation, efficiency, etc. make pro­duction large scale. Free trade enables coun­tries to obtain goods at a cheaper price. This leads to a rise in the standard of living of people of the world. Thus, free trade leads to higher production, higher consumption and higher all-round international prosperity.

(iii) Competitive spirit prevails

Thirdly, free trade keeps the spirit of competition of the economy. As there exists the possibility of intense foreign competition under free trade, domestic producers do not want to lose their grounds. Competition enhances efficiency. Moreover, it tends to prevent domestic mo­nopolies and free the consumers from exploitation.

(iv) Accessibility of domestically unavail­able goods and raw materials

Fourthly, free trade enables each country to get commodi­ties which it cannot produce at all or can only produce inefficiently. Commodities and raw materials unavailable domestically can be pro­cured through free movement even at a low price.

(v) Greater international cooperation

Fifthly, free trade safeguards against discrimi­nation. Under free trade, there is no scope for cornering raw materials or commodities by any country. Free trade can, thus, promote international peace and stability through eco­nomic and political cooperation.

(vi) Free from interference

Finally, free trade is free from bureaucratic interferences. Bu­reaucracy and corruption are very much as­sociated with unrestricted trade.

In brief, restricted trade prevents a nation from reaping the benefits of specialisation, forces it to adopt less efficient production techniques and forces consumers to pay higher prices for the products of protected industries.

Arguments against Free Trade

Despite these virtues, several people jus­tify trade restrictions.

Following arguments are often cited against free trade

(i) Advantageous not for LDCs

Firstly, free trade may be advantageous to advanced coun­tries and not to backward economies. Free trade has brought enough misery to the poor, less developed countries, if past experience is any guide. India was a classic example of co­lonial dependence of UK’s imperialistic power prior to 1947. Free trade principles have brought colonial imperialism in its wake.

(ii) Destruction of home industries/products

Secondly, it may ruin domestic industries. Because of free trade, imported goods become available at a cheaper price. Thus, an unfair and cut-throat competition develops between domestic and foreign industries. In the process, domestic industries are wiped out. Indian handicrafts industries suffered tremendously during the British regime.

(iii) Inefficient industries remain perpetually inefficient

Thirdly, free trade cannot bring all-round development of industries. Comparative cost principle states that a coun­try specialises in the production of a few com­modities. On the other hand, inefficient indus­tries remain neglected. Thus, under free trade, an all-round development is ruled out.

(iv) Danger of overdependence

Fourthly, free trade brings in the danger of dependence. A country may face economic depression if its international trading partner suffers from it. The Great Depression that sparked off in 1929-30 in the US economy swept all over the world and all countries suffered badly even if their economies were not caught in the grip of depression. Such overdependence following free trade becomes also catastrophic during war.

(v) Penetration of harmful foreign com­modities

Finally, a country may have to change its consumption habits. Because of free trade, even harmful commodities (like drugs, etc.) enter the domestic market. To prevent such, restrictions on trade are required to be imposed.

In view of all these arguments against free trade, governments of less developed coun­tries in the post-Second World War period were encouraged to resort to some kind of trade restrictions to safeguard national interest.

Free Trade Theories

Since the days of the Ancient Greeks, economists have studied and debated the theories and effects of international trade policy. Do trade restrictions help or hurt the countries that impose them? And which trade policy, from strict protectionism to totally free trade is best for a given country? Through the years of debates over the benefits versus the costs of free trade policies to domestic industries, two predominant theories of free trade have emerged: mercantilism and comparative advantage.

Mercantilism

Mercantilism is the theory of maximizing revenue through exporting goods and services. The goal of mercantilism is a favorable balance of trade, in which the value of the goods a country exports exceeds the value of goods it imports. High tariffs on imported manufactured goods are a common characteristic of mercantilist policy. Advocates argue that mercantilist policy helps governments avoid trade deficits, in which expenditures for imports exceeds revenue from exports. For example, the United States, due to its elimination of mercantilist policies over time, has suffered a trade deficit since 1975.

Dominant in Europe from the 16th to the 18th centuries, mercantilism often led to colonial expansion and wars. As a result, it quickly declined in popularity. Today, as multinational organizations such as the WTO work to reduce tariffs globally, free trade agreements and non-tariff trade restrictions are supplanting mercantilist theory.

Comparative Advantage

Comparative advantage holds that all countries will always benefit from cooperation and participation in free trade. Popularly attributed to English economist David Ricardo and his 1817 book “Principles of Political Economy and Taxation,” the law of comparative advantage refers to a country’s ability to produce goods and provide services at a lower cost than other countries. Comparative advantage shares many of the characteristics of globalization, the theory that worldwide openness in trade will improve the standard of living in all countries.

Comparative advantage is the opposite of absolute advantage—a country’s ability to produce more goods at a lower unit cost than other countries. Countries that can charge less for its goods than other countries and still make a profit are said to have an absolute advantage.

Pros and Cons of Free Trade

Would pure global free trade help or hurt the world? Here are a few issues to consider.

Advantages of Free Trade

1. It stimulates economic growth

Even when limited restrictions like tariffs are applied, all countries involved tend to realize greater economic growth. For example, the Office of the US Trade Representative estimates that being a signatory of NAFTA (the North American Free Trade Agreement) increased the United States’ economic growth by 5% annually.

2. It helps consumers

Trade restrictions like tariffs and quotas are implemented to protect local businesses and industries. When trade restrictions are removed, consumers tend to see lower prices because more products imported from countries with lower labor costs become available at the local level.

3. It increases foreign investment

When not faced with trade restrictions, foreign investors tend to pour money into local businesses helping them expand and compete. In addition, many developing and isolated countries benefit from an influx of money from U.S. investors.

4. It reduces government spending

Governments often subsidize local industries, like agriculture, for their loss of income due to export quotas. Once the quotas are lifted, the government’s tax revenues can be used for other purposes.

5. It encourages technology transfer

In addition to human expertise, domestic businesses gain access to the latest technologies developed by their multinational partners.

Disadvantages of Free Trade

1. It causes job loss through outsourcing

Tariffs tend to prevent job outsourcing by keeping product pricing at competitive levels. Free of tariffs, products imported from foreign countries with lower wages cost less. While this may be seemingly good for consumers, it makes it hard for local companies to compete, forcing them to reduce their workforce. Indeed, one of the main objections to NAFTA was that it outsourced American jobs to Mexico.

2. It encourages theft of intellectual property

Many foreign governments, especially those in developing countries, often fail to take intellectual property rights seriously. Without the protection of patent laws, companies often have their innovations and new technologies stolen, forcing them to compete with lower-priced domestically-made fake products.

3. It allows for poor working conditions

Similarly, governments in developing countries rarely have laws to regulate and ensure safe and fair working conditions. Because free trade is partially dependent on a lack of government restrictions, women and children are often forced to work in factories doing heavy labor under slave-like working conditions.

4. It can harm the environment

Emerging countries have few, if any environmental protection laws. Since many free trade opportunities involve the exporting of natural resources like lumber or iron ore, clear-cutting of forests and un-reclaimed strip mining often decimate local environments.

5. It reduces revenues

Due to the high level of competition spurred by unrestricted free trade, the businesses involved ultimately suffer reduced revenues. Smaller businesses in smaller countries are the most vulnerable to this effect.

In the final analysis, the goal of business is to realize a higher profit, while the goal of government is to protect its people. Neither unrestricted free trade nor total protectionism will accomplish both. A mixture of the two, as implemented by multinational free trade agreements, has evolved as the best solution.

Trade protectionism is a policy that protects domestic industries from unfair competition from foreign ones. The four primary tools are tariffs, subsidies, quotas, and currency manipulation.

Protectionism is a politically motivated defensive measure. In the short run, it works. But it is very destructive in the long term. It makes the country and its industries less competitive in international trade.

Arguments for Protection

The concept of protection is not a post-Second World War development. Its origin can be traced to the days of mercantilism (i.e., 16th century). Since then various arguments have been made in favour of protection.

The case for protection for the developing countries received a strong support from Argentine economist R. D. Prebisch and Hans Singer in the 1950s.

All these arguments can be summed up under three heads:

• Fallacious or dubious arguments
• Economic arguments
• Non-economic arguments

1. Fallacious Arguments

Fallacious arguments do not stand after scrutiny. These arguments are dubious in nature in the sense that both are true. ‘To keep money at home’ is one such fallacious argu­ment. By restricting trade, a country need not spend money to buy imported articles. If every nation pursues this goal, ultimately global trade will squeeze.

2. Economic Arguments

(a) Infant industry argument

Perhaps the oldest as well as the cogent argument for pro­tection is the infant industry argument. When the industry is first established its costs will be higher. It is too immature to reap econo­mies of scale at its infancy. Workers are not only inexperienced but also less efficient. If this infant industry is allowed to grow inde­pendently, surely it will be unable to compete effectively with the already established indus­tries of other countries.

Thus, an infant industry needs protection of a temporary nature and over time will experience some sort of ‘learn­ing effect’. Given time to develop an indus­try, it is quite likely that in the near future it will be able to develop a comparative advan­tage, withstand foreign competition and sur­vive without protection.

It is something like the dictum: Nurse the baby, protect the child, and free the adult. Once an embryonic indus­try gets matured it can withstand competition. Competition improves efficiency. Once efficiency is attained, protection may be with­drawn. Thus, an underdeveloped country at­tempting to have rapid industrialisation needs protection of certain industries.

However, in actual practice, the infant industry argument, even in LDCs, loses some strength. Some economists suggest production subsidy rather than protection of certain in­fant industries. Protection, once granted to an industry, continues for a long time. On the other hand, subsidy is a temporary measure since continuance of it in the next year requires approval of the legislature.

Above all, expenditure on subsidy is subject to financial audit. Thus, protection is something like a “gift”. Secondly, protection saps the self-sufficiency outlook of the protected industries. Once protection is granted, it becomes difficult to with­draw it even after attaining maturity. That means infant industries, even after maturity, get ‘old age pension’.

In other words, infant industries become too much dependent on tariffs and other countries. Thirdly, it is diffi­cult to identify potential comparative advantage industries. A time period of 5 to 10 years may be required by an industry to achieve maturity or self-sufficiency. Under the circum­stances, infant industry argument loses force.

In view of these criticisms, it is said by ex­perts that the argument “boils down to a case for the removal of obstacles to the growth of the infants. It does not demonstrate that a tariff is the most efficient means of attaining the objective.”

These counter-arguments, however, do not deter us to support the growth of infant in­dustries in less developed countries by means of tariff, rather than subsidies.

(b) Diversification argument

As free trade increases specialisation, so protected trade brings in diversified industrial structure. By setting up newer and variety of industries through protective means, a country minimises the risk in production. Comparative ad­vantage principle dictates narrow specialisation in production.

This sort of specialisation is not only undesirable from the viewpoint of economic development, but also a risky proposition. Efficiency in production in some prod­ucts by some countries (e.g., coffee of Brazil, milk product of New Zealand, oil of Middle East countries) results in overdependence on these products.

If war breaks out, or if politi­cal relations between countries change, or if recessionary demand condition for the prod­uct grows up abroad, the economies of these industries will be greatly injured. Above all, this sort of unbalanced industrial growth goes against the spirit of national self-sufficiency. Protection is the answer to this problem. A government encourages diverse industries to develop through protective means.

However, a counter-argument runs. Politics, rather than economics, may be the crite­rion for the selection of industries to be pro­tected in order to produce diversification at a reasonable cost. But, one must not ignore economics of protection.

(c) Employment argument

Protection can raise the level of employment. Tariffs may re­duce import and, in the process, import competing industries flourish. In addition, import- substituting industries the substitution of domestic production for imports of manufactures develop. The strategy of import-sub­stituting industrialisation promotes domestic industry at the expense of foreign industries.

Thus, employment potential under protective regime is quite favourable. In brief, tariff stimulates investment in import-competing and import substitution industries. Such investment produces favourable employment multiplier.

But cut in imports following import sub­stituting industrialisation strategy may ulti­mately cause our exports to decline.

(d) Balance of payments argument

A deficit in the balance of payments can be cured by curtailing imports. However, imports will decline following a rise in tariff rate provided other trading partners do not retaliate by im­posing tariff on a country’s export. However, import restrictions through tariff may be un­called for if the balance of payments crisis be­comes serious and chronic. In view of this and other associated problems of tariff, it is said that tariff is a second best policy.

(e) Anti-dumping argument

Usually, we hear about unfair competition from firms of low-cost countries. One particular form of un­fair competition is dumping which is outlawed by international trade pacts, such as WTO. Dumping is a form of price discrimination that occurs in trade. Dumping occurs when a coun­try sells a product abroad at a low price because of competition and at a high price in the home market because of monopoly power.

In other words, dumping is a kind of subsidy given to export goods. This unfair practice can be pre­vented by imposing tariff. Otherwise, workers and firms competing with the dumped prod­ucts will be hit hard.

(f) Strategic trade advantage argument

It is argued that tariffs and other import restric­tions create a strategic advantage in producing some new products having potential for generating some net profit. There are some large firms who prevent entry of new firms because of the economies of large scale pro­duction. Thus, these large firms reap pure profits over the long run during which new firms may not dare enough to compete with these established large firms. Thus, the large scale economies themselves prevent entry of new firms.

But as far as new products are concerned, a new firm may develop and market these products and reap substantial profit. Ulti­mately, successful new firms producing new products become one of the few established firms in the industry. New firms showing po­tential for the future must be protected. “If protection in the domestic market can increase the chance that one of the protected domestic firms will become one of the established firms in the international market, the protection may pay off.”

3. Non-Economic Arguments

(a) National defense argument

There are some industries which may be inefficient by birth or high cost due to many reasons and must be protected. This logic may apply to the production of national defence goods or nec­essary food items. Whatever the cost may be, there is no question of compromise for the defence industry since ‘defence is more im­portant than opulence’. Dependence on for­eign countries regarding supply of basic food items as well as defence products is absolutely unwise.

However, objections against this argument may be cited here. It is difficult to identify a particular item as a defence industry item be­cause we have seen that many industries— from garlic to clothespin—applied for protec­tion on defence grounds. Candlestick-maker (for emergency lighting) and toothpick-maker (to have good dental hygiene for the troops) demanded protection at different times at dif­ferent places. A nation which builds up its military strength through tariff protection does not sound convincing. Thus, tariff is a second-best solution.

(b) Miscellaneous arguments against protection

There are some good ‘side effects’ or ‘spillover effects’ of protection. This means that it produces some undesirable effects on the economy and the basic objective of pro­tection can be attained rather in a costless manner by other direct means other than pro­tection. That is, protection is never more than a second-best solution.

Firstly, protection distorts the com­parative advantage in production. This means that specialisation in production may be lost if a country imposes tariff. All these lead to squeezing of trade. Secondly, it im­poses a cost on the society since consumers buy goods at a high price. Thirdly, often weak declining industries having no potential fu­ture stay on the economy under the protec­tive umbrella. Fourthly, international tension often escalates, particularly when tariff war begins.

Usually, a foreign country retaliates by imposing tariff on its imports from the tariff-imposing country. Once the retaliatory attitude (i.e., ‘beggar-my-neighbour policy’) develops, benefits from protection will be lost. Finally, protection encourages bureauc­racy. Increase in trade restrictions means expansion of governmental activity and, hence, rise in administrative cost. Bureauc­racy ultimately leads to corruption.

Conclusion

The classical golden age of free trade no longer exists in the world. But, free trade concept has not been abandoned since the case for free trade is strongest in the long run. Protection is a short term measure. Thus, the issue for public policy is the best rec­onciliation of these two perspectives so that gains from trade (may be free or restricted) become the greatest.

In recent times (July 2008), most of the countries (153) are members of the World Trade Organisation (WTO) which favour more free trade than restricted trade. This phi­losophy gathered momentum in the Dunkel Draft and General Agreement on Tariffs and Trade (GATT) negotiations. The aims of both the GATT (abolished in 1995) and now the WTO are trade liberalisation rather than trade restrictions.

According to the Ministry of Commerce and Industry, the fifteen largest trading partners of India represent 59.37% of total trade by India in the financial year 2015-2016. These figures include trade in goods and commodities, but do not include services or foreign direct investment.

The two largest goods traded by India are mineral fuels (refined / unrefined) and gold (finished gold ware / gold metal). In the year 2013-14, mineral fuels (HS code 27) were the largest traded item with 181.383 billion US$ worth imports and 64.685 billion US$ worth re-exports after refining. In the year 2013-14, gold and its finished items (HS code 71) were the second largest traded items with 58.465 billion US$ worth imports and 41.692 billion US$ worth re-exports after value addition. These two goods are constituting 53% total imports, 34% total exports and nearly 100% of total trade deficit (136 billion US$) of India in the financial year 2013-14. The services trade (exports and imports) are not part of commodities trade. The trade surplus in services trade is US$70 billion in the year 2017-18.

Counting the European Union as one, the WTO ranks India fifth for commercial services exports and sixth for commercial services imports.

The two main destinations of exported Indian merchandises is the EU market and the USA, when the two main markets of origin are China and the EU.

Officially named the Republic of India, India is a South Asian nation that shares land borders with China, Nepal and Bhutan to its north-east, Burma and Bangladesh to its east, and Pakistan to its west.

India shipped US$323.1 billion worth of products around the globe in 2018. That dollar figure represents a 1.7% increase since 2014 and a 9.2% gain from 2017 to 2018.

Applying a continental lens, almost half (49.3%) of Indian exports by value were delivered to fellow Asian countries. Another 19.3% was sold to European importers while 18% went to North America.

Smaller percentages went to Africa (8.3%), Latin America (2.9%) excluding Mexico but including the Caribbean, then Oceania (1.3%) led by Australia.

Top 15 Trading Partners of India

Below is a list highlighting 15 of India’s top trading partners in terms of countries that imported the most Indian shipments by dollar value during 2018. Also shown is each import country’s percentage of total Indian exports.

1. United States: US$51.6 billion (16% of total Indian exports)
2. United Arab Emirates: $29 billion (9%)
3. China: $16.4 billion (5.1%)
4. Hong Kong: $13.2 billion (4.1%)
5. Singapore: $10.4 billion (3.2%)
6. United Kingdom: $9.8 billion (3%)
7. Germany: $9 billion (2.8%)
8. Bangladesh: $8.8 billion (2.7%)
9. Netherlands: $8.7 billion (2.7%)
10. Nepal: $7.3 billion (2.3%)
11. Belgium: $6.8 billion (2.1%)
12. Vietnam: $6.7 billion (2.1%)
13. Malaysia: $6.5 billion (2%)
14. Italy: $5.5 billion (1.7%)
15. Saudi Arabia: $5.5 billion (1.7%)

About three-fifths (60.4%) of Indian exports in 2018 were delivered to the above 15 trade partners.

The Netherlands increased its import purchases from India from 2017 to 2018 by the leading 59.3%. In second place was Nepal with a 32.2% gain in value. China boosted its imports from India by 31.3%, trailed by a 21.4% improvement for Bangladesh, a 17.7% uptick for Malaysia and a 12% boost from United States-based importers.

Leading the decliners were importers in Vietnam (down -17.4%), Hong Kong (down -12%) then Singapore (down -9.9%).

Deficits

India incurred an overall -$184.5 billion trade deficit for all products during 2018, expanding 24.5% from its -$148.2 billion in red ink one year earlier.

A country whose total value of all imported goods is higher than its value of all exports is said to have a negative trade balance or deficit.

It would be unrealistic for any exporting nation to expect across-the-board positive trade balances with all its importing partners. That export country doesn’t necessarily post a negative trade balance with each individual partner with which it exchanges exports and imports.

India incurred the highest trade deficits with the following countries:

1. China: -US$57.3 billion (country-specific trade deficit in 2018)
2. Saudi Arabia: -$22.9 billion
3. Iraq: -$21.2 billion
4. Switzerland: -$16.8 billion
5. Iran: -$11.9 billion
6. South Korea: -$11.6 billion
7. Indonesia: -$11.2 billion
8. Australia: -$10.4 billion
9. Qatar: -$8.9 billion
10. Nigeria: -$8.4 billion

Among India’s trading partners that cause the greatest negative trade balances, Indian deficits with Iraq (up 50.9%), Saudi Arabia (up 44.3%) and Iran (up 40.9%) grew at the fastest pace from 2017 to 2018.

These cashflow deficiencies clearly indicate India’s competitive disadvantages with the above countries, but also represent key opportunities for India to develop country-specific strategies to strengthen its overall position in international trade.

Surpluses

A country whose total value of all imported goods is lower than its value of all exports is said to have a positive trade balance or surplus.

India incurred the highest trade surpluses with the following countries:

1. United States: US$19 billion (country-specific trade surplus in 2018)
2. Bangladesh: $7.9 billion
3. Nepal: $6.9 billion
4. Netherlands: $5 billion
5. Sri Lanka: $3.3 billion
6. Turkey: $3.3 billion
7. United Kingdom: $2.7 billion
8. Spain: $2.4 billion
9. United Arab Emirates: $2.2 billion
10. Kenya: $2 billion

Among India’s trading partners that generate the greatest positive trade balances, Indian surpluses with the Netherlands (up 60.5%), Nepal (up 35.1%) and Spain (up 26.6%) grew at the fastest pace from 2017 to 2018.

These positive cash flow streams clearly indicate India’s competitive advantages with the above countries, but also represent key opportunities for India to develop country-specific strategies to optimize its overall position in international trade.

Companies Servicing Indian Trading Partners

India placed over 50 corporations on the Forbes Global 2000 rankings. Many of these are major Indian export companies. Below is a selection of some of the biggest Indian corporations.

1. Reliance Industries (oil, gas)
2. Tata Motors (cars, trucks)
3. Indian Oil (oil, gas)
4. Coal India (diversified metals, mining)
5. ITC (tobacco)
6. Bharat Heavy Electricals (electrical equipment)
7. Hindalco Industries (aluminum)
8. Tata Steel (iron, steel)
9. Bharat Petroleum (oil, gas)
10. Hindustan Petroleum (oil, gas)
11. Sun Pharma Industries (pharmaceuticals)
12. Steel Authority of India (iron, steel)
13. Bajaj Auto (recreational products)
14. Hero Motocorp (recreational products)
15. Grasim Industries (construction materials)
16. JSW Steel (iron, steel)

Foreign trade financing is required especially to get funds to carry out foreign trade operations. Depending on the types and attributes of financing, there are five major methods of transactions in foreign trade. In this chapter, we will discuss the methods of transactions and finance normally utilized in foreign trade and investment operations.

Foreign Trade Payment Methods

The five major processes of transaction in foreign trade are the following −

1. Prepayment

Prepayment occurs when the payment of a debt or installment payment is done before the due date. A prepayment can include the entire balance or any upcoming part of the entire payment paid in advance of the due date. In prepayment, the borrower is obligated by a contract to pay for the due amount. Examples of prepayment include rent or loan repayments.

2. Letter of Credit

A Letter of Credit is a letter from a bank that guarantees that the payment due by the buyer to a seller will be made timely and for the given amount. In case the buyer cannot make payment, the bank will cover the entire or remaining portion of the payment.

3. Drafts

• Sight Draft − It is a kind of bill of exchange, where the exporter owns the title to the transported goods until the importer acknowledges and pays for them. Sight drafts are usually found in case of air shipments and ocean shipments for financing the transactions of goods in case of foreign trade.
• Time Draft − It is a type of foreign check guaranteed by the bank. However, it is not payable in full until the duration of time after it is obtained and accepted. In fact, time drafts are a short-term credit vehicle used for financing goods’ transactions in foreign trade.

4. Consignment

It is an arrangement to leave the goods in the possession of another party to sell. Typically, the party that sells receives a good percentage of the sale. Consignments are used to sell a variety of products including artwork, clothing, books, etc. Recently, consignment dealers have become quite trendy, such as those offering specialty items, infant clothing, and luxurious fashion items.

5. Open Account

Open account is a method of making payments for various trade transactions. In this arrangement, the supplier ships the goods to the buyer. After receiving and checking the concerned shipping documents, the buyer credits the supplier’s account in their own books with the required invoice amount.

The account is then usually settled periodically; say monthly, by sending bank drafts by the buyer, or arranging through wire transfers and air mails in favor of the exporter.

Trade Finance Methods

The most popular trade financing methods are the following:

1. Accounts Receivable Financing

It is a special type of asset-financing arrangement. In such an arrangement, a company utilizes the receivables – the money owed by the customers as a collateral in getting a finance.

In this type of financing, the company gets an amount that is a reduced value of the total receivables owed by customers. The time-frame of the receivables exert a large influence on the amount of financing. For older receivables, the company will get less financing. It is also, sometimes, referred to as “factoring”.

2. Letters of Credit

As mentioned earlier, Letters of Credit are one of the oldest methods of trade financing.

4. Banker’s Acceptance

A banker’s acceptance (BA) is a short-term debt instrument that is issued by a firm that guarantees payment by a commercial bank. BAs are used by firms as a part of the commercial transaction. These instruments are like T-Bills and are often used in case of money market funds.

BAs are also traded at a discount from the actual face value on the secondary market. This is an advantage because the BA is not required to be held until maturity. BAs are regular instruments that are used in foreign trade.

5. Working Capital Finance

Working capital finance is a process termed as the capital of a business and is used in its daily trading operations. It is calculated as the current assets minus the current liabilities. For many firms, this is fully made up of trade debtors (bills outstanding) and the trade creditors (the bills the firm needs to pay).

6. Forfaiting

Forfaiting is the purchase of the amount importers owe the exporter at a discounted value by paying cash. The forfaiter that is the buyer of the receivables then becomes the party the importer is obligated to pay the debt.

7. Countertrade

It is a form of foreign trade where goods are exchanged for other goods, in place of hard currency. Countertrade is classified into three major categories: barter, counter-purchase, and offset.

• Barter is the oldest countertrade process. It involves the direct receipt and offer of goods and services having an equivalent value.
• In a counter-purchase, the foreign seller contractually accepts to buy the goods or services obtained from the buyer’s nation for a defined amount.
• In an offset arrangement, the seller assists in marketing the products manufactured in the buying country. It may also allow a portion of the assembly of the exported products for the manufacturers to carry out in the buying country. This is often practiced in the aerospace and defense industries.

All India Financial Institutions (AIFI) is a group composed of development finance institutions and investment institutions that play a pivotal role in the financial markets. Also known as “financial instruments”, the financial institutions assist in the proper allocation of resources, sourcing from businesses that have a surplus and distributing to others who have deficits – this also assists with ensuring the continued circulation of money in the economy. Possibly of greatest significance, the financial institutions act as an intermediary between borrowers and final lenders, providing safety and liquidity. This process subsequently ensures earnings on the investments and savings involved

In Post-Independence India, people were encouraged to increase savings, a tactic intended to provide funds for investment by the Indian government. However, there was a huge gap between the supply of savings and demand for the investment opportunities in the country.

National Level Financial Institutions

1. Bank of Baroda

Started on 20th July 1908, under the Companies Act of 1897 that has now translated into a strong, trustworthy financial body, The Bank of Baroda.

The Bank orchestrated its business strategies around the centrality of the customer. It diversified into areas of merchant banking, housing finance, credit cards and mutual funds.

2. Bank of India

Bank of India is a premier and one of the oldest commercial banks in India, with presence all over India as also in all time zones of the world. The Bank has a glorious history dating back to the early years of this century. The Bank was founded in September 1906 and has all along maintained a position of pride among the top 5 commercial banks in the country.

3. Canara Bank

Canara Bank is one of the premier banks in the country, accredited with umpteen distinctions. The present stature of the Bank is due to its strong fundamentals and quality customer orientations. Profit making since inception, the Bank today epitomizes a perfect blend of commercial and social banking.

4. Central Bank of India

Established in 1911, Central Bank of India was the first Indian commercial bank which was wholly owned and managed by Indians. The establishment of the Bank was the ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir Pherozesha Mehta was the first Chairman of a truly ‘Swadeshi Bank’. In fact, such was the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank as the ‘property of the nation and the country’s asset’. He also added that ‘Central Bank lives on people’s faith and regards itself as the people’s own bank’.

5. Corporation Bank

Established in the year 1906, Corporation Bank is an organization based on the traditional Indian values of service to the community. Corp Bank is regarded as one of the well-run banks in the comity of Public Sector Banks in the country. Corporation Bank is the first Public Sector Bank to publish the results under US GAAP. The Bank has been publishing the results under the US GAAP since 1998-99.

6. Dena Bank

Dena Bank, in July 1969 along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

7. Dhanalakshmi Bank

Dhanalakshmi Bank was incorporated on 14th November 1927 by a group of enterprising entrepreneurs at Thrissur, the cultural capital of Kerala. It became a Scheduled Commercial Bank in the year 1977. It has today attained national stature with 180 branches and 26 Extension Counters spread over the States of Kerala, Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Gujarat, Delhi and West Bengal. The Bank serviced a business of Rs. 4223 crores as on 31.03.06 comprising deposits of Rs.2533 crores and advances of Rs.1690 crores. As at the end of March 2006, the Capital Adequacy Ratio of the Bank was 9.75% well above the mandatory requirement of 9%. The Bank made a net profit of Rs.9.51 crores for the year ended 31st March 2006.

8. National Bank for Agriculture and Rural Development (NABARD)

NABARD is established as a development Bank, in terms of the Preamble of the Act, “for providing and regulating Credit and other facilities for the promotion and development of agriculture, small scale industries, cottage and village industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas and for matters connected therewith or incidental thereto.”

Features of NABARD

(i) Serves as an apex financing agency for the institutions providing investment and production credit for promoting the various developmental activities in rural areas;

(ii) Takes measures towards institution building for improving absorptive capacity of the credit delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of credit institutions, training of personnel, etc. ;

(iii) Co-ordinates the rural financing activities of all institutions engaged in developmental work at the field level and maintains liaison with Government of India, State Governments, Reserve Bank of India (RBI) and other national level institutions concerned with policy formulation; and

(iv) Undertakes monitoring and evaluation of projects refinanced by it.

9. Oriental Bank of Commerce

Established in Lahore on 19th February 1943, Oriental Bank of Commerce made a modest beginning under its Founding Father, Late Rai Bahadur Lala Sohan Lal, the first Chairman of the Bank.

10. State Bank of India

State Bank of India was constituted on 1 July 1955. More than a quarter of the resources of the Indian banking system thus passed under the direct control of the State. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries (later named Associates).

The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. All the branches and administrative offices throughout the country sponsor and participate in large number of welfare activities and social causes. Business is more than banking because we touch the lives of people anywhere in many ways.