Category: Management Notes

The transporting of goods or passengers by a ship registered in one country that takes place solely from port to port of another country (along the coast) and usually governed by that country’s national law. Laws granting permission to conduct coastal trade are generally restrictive in every country. Also called cabotage.

India has a long coastline, spanning 7516.6 kilometres, forming one of the biggest peninsulas in the world. It is serviced by 13 major ports (12 government and 1 corporate) and 187 notified minor and intermediate ports. These ports account for nearly 90% (by volume) of India’s international trade. Yet, coastal shipping accounts for only 6 per cent of the country’s total domestic freight (on a tonne-km basis).

The explosive economic growth as seen in India over the past decade has led to congested roads and over burned railway network. India has 4 million kms of roads, accounting for nearly 60% of the domestic traffic of which the National Highways’, which are 1.7% of the network, carry as much as 40% of the road freight. The Indian Railway network, one of the largest in the world is overburdened and operating at over 100% utilization. While there are numerous projects for up gradation are under way. These projects are unlikely to keep pace and meet the future demand

Coastal shipping / short sea shipping – is an alternate mode for transportation that can help address the challenges faced through use of road and rail. World over use of sea/waterways for transportation is a much more prevalent mode. From the chart below it is apparent that India as a very significant dependence on road to move cargo. In the case of China, waterways have a larger share than that of road. There are many inherent advantages of this mode of transportation. Coastal shipping or use of water as a mode of transportation is much safer, more economical and less polluting. It is clearly evident from the numbers represented in the chart. Waterways are 50% cheaper than road and nearly 30% cheaper than rail. The coastal leg, apart from being more fuel efficient, can also carry larger parcel sizes and provides a great opportunity for consolidation of loads

Pros:

• Costs – Very competitive compared to road
• Speed – Quick compared to road (after a volume of a couple of container loads) if city is near the coast
• Customs formalities – No need to worry about state borders and state permits, but process customs formalities at destination port etc. Simpler than EXIM cargo.

Cons:

• India has a rule akin to Jones Act a.k.a Merchant Marine Act of 1920 (which limits competition along coastal shipping) and flag restrictions (ownership domicile)

Trade of Uttar Pradesh

Terms of trade (TOT) represent the ratio between a country’s export prices and its import prices. How many units of exports are required to purchase a single unit of imports? The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100.

When more capital is leaving the country then is entering into the country then the country’s TOT is less than 100%. When the TOT is greater than 100%, the country is accumulating more capital from exports than it is spending on imports.

The TOT is used as an indicator of a country’s economic health, but it can lead analysts to draw the wrong conclusions. Changes in import prices and export prices impact the TOT, and it’s important to understand what caused the price increases or decreases. TOT measurements are often recorded in an index for economic monitoring purposes.

An improvement or increase in a country’s TOT generally indicates that export prices have gone up as import prices have either maintained or dropped. Conversely, export prices might have dropped but not as significantly as import prices. Export prices might remain steady while import prices have decreased or they might have simply increased at a faster pace than import prices. All these scenarios can result in an improved TOT.

Factors Affecting Terms of Trade

A TOT is dependent to some extent on exchange and inflation rates and prices. A variety of other factors influence the TOT as well, and some are unique to specific sectors and industries.

Scarcity—the number of goods available for trade—is one such factor. The more goods a vendor has available for sale, the more goods it will likely sell, and the more goods that vendor can buy using capital obtained from sales.

The size and quality of goods also affect TOT. Larger and higher-quality goods will likely cost more. If goods sell for a higher price, a seller will have additional capital to purchase more goods.

Fluctuating Terms of Trade

A country can purchase more imported goods for every unit of export that it sells when its TOT improves. An increase in the TOT can, therefore, be beneficial because the country needs fewer exports to buy a given number of imports.

It might also have a positive impact on domestic cost-push inflation when the TOT increases because the increase is indicative of falling import prices to export prices. The country’s export volumes could fall to the detriment of the balance of payments (BOP), however.

The country must export a greater number of units to purchase the same number of imports when its TOT deteriorates. The Prebisch-Singer hypothesis states that some emerging markets and developing countries have experienced declining TOTs because of a generalized decline in the price of commodities relative to the price of manufactured goods.

Developing countries experienced increases in their terms of trade during the commodity price boom in the early 2000s. They could buy more consumer goods from other countries when selling a certain quantity of commodities, such as oil and copper.

In the past two decades, however, a rise in globalization has reduced the price of manufactured goods. Industrialized countries’ advantage over developing countries is becoming less significant.

• The ratio is calculated by dividing the price of the exports by the price of the imports and multiplying the result by 100.
• When more capital is leaving the country than is entering into the country, then a country’s TOT is less than 100%.
• An improvement or increase in a country’s TOT generally indicates that export prices have gone up as import prices have either maintained or dropped.

Even being a typical poor underdeveloped country, India’s foreign trade was in a prosperous state during the period under review. In terms of volume of trade and the range of commodities entering into trading list, India was better placed compared to other contemporary underdeveloped countries. But that must not be viewed as an indicator of prosperity. Above all, her pattern of trade was definitely different from those of other underdeveloped countries.

India’s composition of trade (i.e., pattern of imports and exports) before 1813 included manufactured goods as well as primary articles in export list and metals and luxury products in the import list. But such pattern of trade was supplanted by the import of manufactured goods and exports of agricultural raw materials and food grains during much of the nineteenth and twentieth century. This must not be the sign of prosperity or cause for jubilation.

Rather, this situation generated much heat and controversy because, instead of being an engine of growth, foreign trade, as engineered by the British Government, exacerbated economic exploita­tion. It hampered the process of industrialization. It brought untold misery to the masses. Most importantly, of course partly the backwardness of Indian industry and agriculture is ‘the effect of its external trade which moulded into shape the productive mechanism of the country.’

To understand the nature of the controversy it will be fruitful to tell something about the history of India’s foreign trade during 1757 and 1947. The growth of foreign trade during the two centuries can be divided into following unequal periods: 1757 to 1813, 1814 to 1857, 1858 to 1914, and from 1915 to 1947.

The first period—the early years of the British East India Company (EIC)—is known as the ‘age of mercantilism’. During the period under consideration trade statistics is not available. However, some sort of institutional changes in trade took place during this period.

In the mid-18th century, Indian foreign trade was mainly conducted by the English, Dutch, French, and Portuguese traders and merchants. But the revolution of 1757 strengthened the supremacy of the British EIC. In the process, the EIC monopolized trade and ousted the other merchants and traders.

During this period, the composition of trade was based on an exchange of calico, spices and foodstuff and other raw materials for precious bullion (i.e., gold and silver) imported from Europe. The second period dating from 1814 to 1857 saw some fundamental structural changes in the composition of trade when India was reduced to a mere supplier of agricultural products in exchange for imports of finished manufactured articles.

The third period covering roughly 50 years from 1858 to the outbreak of the World War I displayed more or less the same structural features relating to the pattern of trade. This period saw the emergence of multilateral trade. During the inter-war period, India’s foreign trade was of a rollercoaster variety— characterised by boom and slump and revival.

Volume of Foreign Trade Since 1814

It has often been stated that though no industrial revolution during the British rule visited this country, she did go undergo a revolution in commerce as is evident from the volume of trade expansion. Between 1869-70 and 1929-30, the value of foreign trade saw a seven-fold increase.

We ignore trade developments for the period 1757 to 1813 mainly because of the absence of a continuous series of trade statistics before 1800. Above all, trade during this period retained pre-modern character. It has been estimated that the value of trade between India and England for the period 1793-1813 stood at the average annual figure of 2 million pounds. Or India’s foreign trade got the tinge of modern character after 1813. Virtually, throughout the 19th century, there had been a spectacular expansion in trade.

Expansion of trade along with the expansion of railway bore the stamp of growing prosperity of India as was told by the alien ruler. In fact, they prided themselves on this phenomenon. But nationalists dwelt on the ‘negative fairness’. They argued that the real progress of the nation did not lay on the volume and the value of trade. The pattern of trade that the Britishers instituted in this country was really the cause of utmost concern. Actually, it produced a negative impact on the Indian economy from which it could not recover even after 1947.

Prior to the enactment of the Charter Act of 1813, all goods entering or leaving India had to be shipped by the British EIC. Such an institutional restriction (or the monopoly of foreign trade) went away with the passing of the Charter Act of 1813. Despite the level-playing field created by this Act, India’s trading links with the British world had no parallel till 1947.

The era of industrial capitalism covering the period from 1814 to 1858 saw the emergence of a trade policy popularly known as ‘free trade’ policy. Through this instrument of trade, Indian economy was made colonial and dependent economy based on world capitalism. Leaving aside this qualitative aspect of trade, let us take a look at the quantitative aspect of trade.

At the beginning, it must be remembered that, before 1834-35, trade statistics were inadequate to answer a lot of questions. This can be attributed to the different currency systems prevailing in Bengal, Madras, and Bombay through which the bulk of India’s sea-borne trade passed. Consequently, compilation of trade data on an all-India basis was virtually impossible.

Meanwhile, with the introduction of a uniform currency throughout India in 1835, as well as the availability and reliability of trade statistics of a continuous series, it became possible to calculate the growth rate in foreign trade. Between 1835 and 1850, the average annual rate of growth was 3.61 p.c. for exports and 5.61 p.c. for imports. Export growth rate almost doubled but remained less than that of imports in the next decade. Imports and exports recorded highest growth rates during 1834 and 1866, due to the Crimean War (1853-1856) and the massive expansion in railway network.

Although the volume of overseas trade continued to rise, the decadal growth rates were slowed down in the last quarter of the nineteenth century. The decade of 1890s was marked by stagnation in foreign trade due to the interplay of various factors. The table turned around 1900.

Rates of growth of exports and imports during the first decade of the twentieth century exceeded all nineteenth century ones, except for the 1850s. Not only the volume of trade expanded but also the value figures of trade bulged out possibly due to the rapidly rising price level.

Such growth in trade is attributed to the imposition of free trade policy with the objective of expanding market in India and to save her industries which were on the decline. Such policy freed India to accept British imports either at nominal duties or free while Indian manufactures were subjected to high import duties in England. This policy yielded a great dividend to our ruler. However, trade expanded significantly after 1845.

The outbreak of the First World War caused a great setback to India’s foreign trade, mainly import trade. This was so because during this period import was difficult to obtain. But in 1916 export trade recovered and reached the pre-war peak because of the large scale war, demand for Indian jute bags, hides and skins and other strategic materials.

However, this boom in export did not last long. On the other hand, during the war, imports declined by 67 p.c., mainly due to the disruption in the supply side following the World War I. After the World War I, there had been a tremendous spurt in imports mainly due to the overvaluation of exchange value of rupee. Though exports grew faster than imports after 1922, its growth rate slackened drastically after 1925.

The decade of 1920s experienced Great Depression in 1929. Its impact was so severe that decadal growth rate of trade turned out to be a negative one. Recovery occurred in 1933-34, albeit at a slow pace. Once again, the recessionary tendencies that erupted in the USA and lasted for two years (1937-39) halted the general recovery.

With so many uncertainties in the political arena of this country and the closure of overseas markets following the World War II, India’s foreign trade expanded both in volume and value. But high figures for exports and imports must not be the cause for jubilation because the rise in value figures was due to high inflationary price rise prevailing in the country. In other words, the actual state of foreign trade was not altogether satisfactory.

One of the important characteristic of foreign trade was the continuous presence of excess of exports over imports (from 1870-1939, except 1920-21 and 1921-22)—a situation called the favourable balance of trade. Unfortunately, this imposed unilateral transfer of funds on the country or made the terms of trade adverse to the country.

While referring its consequence, B.N. Ganguli stated that “the growth of India’s export trade has imposed a disproportionate burden on the agriculturists and forced them to sell ‘non-paying’ crops like cotton on unfavorable ‘real’ terms of exchange.”

Commodity Composition of Trade Since 1814

Composition of trade is a very important aspect of a country’s foreign trade. By analysing our imports we can see what are the things that we lacks and how much of them we need and are able to get. It also pinpoints those areas/items which account for a substantial portion of our total import bill. Then we can take proper measures. Composition of exports tells us about the things we have and how much of them we are willing to sell.

It also indicates those areas/items where proper emphasis needs to be given. Analysed over a period of time, the composition of trade reflects the development taking place in the internal structure of production and, above all, the level of development of the country concerned. Thus the structure and composition of exports and imports tell a lot about an economy.

The expansion of trade during the period under review may be construed as an advantage to any country. But because of the radical changes in the structure and composition of trade, the expansion of trade proved ruinous to Indian industry. In the eighteenth century, India was one of the biggest producers and exporters of cotton fabrics. But she slipped to a position of one of the largest consumers of foreign manufactures. She now saw the domestic market inundated with foreign imports.

The composition of India’s imports and exports underwent a radical transformation during the nineteenth century. Prior to 1813, she was primarily an exporter of manufactured articles and importer of bullion and luxury products. Such pattern of trade underwent a sea-change due to India’s colonial status, the bias being overwhelmingly towards the export of agricultural raw materials and food-grains and the import of manufactured goods especially cotton yarn and cloth. Possibly such shifts in export trade originated from outside.

Under the mighty impact of industrial revolution that took place in England in the mid-18th century, the cotton textile industry had been revolutionalised. Now a finer and cheaper variety of cotton cloth came to India which resulted in a major shift in the composition of export trade. Cotton piece goods, indigo, raw silk and opium were the principal export items between 1814 and 1850.

All these items taken together constituted 56 p.c. to 64 p.c. of the total value of trade. Among these, the disappearance of cotton manufactures was the most dramatic one. In 1811-12, the percentage share of cotton goods in total export value was 33 p.c. By 1850, it plummeted to as low as 3.7 p.c. Thus, the elimination of India’s textile industry from international markets was all but complete.

Same is true with indigo which lost its competitive edge due to rapid growth in the cultivation of dye plant in the West Indies in the early years of the 18th century. The percentage share of exports of indigo, though increased from 18.5 p.c. in 1811 to 2.7 p.c. in 1828, came down to 10.9 p.c. by 1850. The contribution of raw silk towards exports declined from 8.3 p.c. in 1811 to 3.8 p.c. in 1850. The percentage share of opium exports, though declined from 23.8 p.c. in 1811 to 10 p.c. in 1839, rose to a high of 30.1 p.c. by 1850.

Meanwhile, India’s traditional handicraft industries had been completely ruined by the ‘White’ ruler in the interests of British manufactures. Consequently, after 1850, cotton textiles and exportable items were gradually replaced by a variety of agriculture-related products, chief of them being raw cotton, raw jute, food-grains, manufactured jute goods, tea, seeds, hides and skins. India’s export trade before 1850 was narrow-based, having a bias on primary agricultural commodity. Now, after 1850, it became more diversified.

As is seen from the composition of exports after the second half of the nineteenth century, most of these exports were in the nature of agriculture-related commodities. But these items were “really in the category of semi-manufactures as many of them received considerable processing before they were internationally traded”.

Percentage share of exports of raw cotton in total exports fluctuated widely between 1850 and 1935. Its share was as low as 9.4 p.c. in 1900 as against 19.1 p.c. in 1850 or 35.2 p.c. in 1870. It rose from 9 p.c. to 21 p.c. in 1935. The percentage share of manufactured goods rose sizably from 0.9 p.c. in 1850 to 10.1 p.c. in 1900 but then it declined to 8.5 p.c. in 1935.

During the 50 years preceding 1914, greater part of India’s exports came to consist of food-grains like wheat, rice, and tea which regularly accounted for 10 p.c. to 20 p.c. of total export value. The single- most important cause giving rise to a phenomenal expansion of export trade of food-grains was the opening of the Suez Canal in 1869.

In addition, the British Government encouraged the export of food-grains by abolishing export duty on wheat. However, with the opening of the Suez Canal, the country witnessed an extraordinary expansion of India’s foreign trade. Its value rose from £ 90 million in 1868-69 to £ 200 million in 1913-14 and to £ 400 million before the onset of the Great Depression.

Whatever the reasons behind the high volume of exports of food-grains, it proved to be a blessing in disguise since food-grains export helped India to earn sufficient annual exchange balance to pay ‘Home Charges’. Large scale export of food-grains also determined the choice of crops that the cultivators would make.

Under the impact of rising export of food-grain, cultivators of the Punjab, Sind and North Western Provinces went for wheat cultivation. Bengal farmers extended the area for jute cultivation, while Madras farmers concentrated in the production of oilseeds.

Rising export of food-grains led to shrinkage in the demand for indigo and, in its place, commercial crops became important. However, a side effect was noticed in Berar region which witnessed a permanent deficit in food-grains. To tackle this, this region went for importation of food-grains against the sale of cotton and a variety of commercial crops.

It will not be out of place to point out here that the growth of Indian exports was assisted by the extension of internal trade and transport networks, mainly the railways after 1850. Coming to the import side, we can say that the composition of India’s import trade from 1850 to 1935 remained virtually stable.

For our purposes, we want to classify the structure of Indian imports into three groups:

(i) Foodstuff (such as coffee, Chinese tea, sugar, and spices),

(ii) Luxury goods (such as, Arabian incense and carpets and horses from Persia, wines and spirits), and

(iii) Mass consumption goods (such as, cotton textile, metal goods, paper, and glassware).

India’s import of goods fully manufactured constituted 61.9 p.c. of total imports in 1885 and that of goods partly manufactured came to roughly 80 p.c. In view of this, K. N. Chaudhuri commented that “the revolution in the commodity composition of imports was complete and the cotton manufactures had emerged as the single most important class of foreign goods consumed in the sub-continent”.

Such a change in the structure of imports had far-reaching implication. Hitherto, merchandise imports constituted an insignificant amount as they were mostly conspicuous consumption goods. But now cotton goods came to predominate in India’s import list. This meant that “India was now becoming dependent on foreign sources for the supply of the second-most important item of domestic budget, clothing. Although the proportion of imported cloth in total domestic consumption was likely to be small in India before 1840, the rate at which the trade in piece goods expanded could mean that by the 1860s Britain was supplying a substantial part of the entire Indian market. It is clear that the British manufactures encountered little competition in this branch of trade, and the importance of cotton exports to India which compared nearly 60 per cent of total British exports to the sub-continent, can scarcely be exaggerated”.

Cotton piece goods constituted 31.5 p.c. of the total imports in 1850. It rose to 47 p.c. in 1870. However, the rate of expansion since then slowed down and its share in total imports dropped to as low as 26.4 p.c. in 1920. Other important import items were cotton twist and yarn, metals, railway materials, and, after 1880, mineral oils. Most of these imported articles were mainly consumer goods where Great Britain enjoyed a comparative advantage in production. This is true of intermediate goods like cotton yarn and twist, railway materials.

Fortunately, for these imported articles, an import multiplier, of course in an indirect manner, came into operation. Such import multiplier very rightly stimulated the country’s economic growth. For instance, declining handloom textiles received a forward push from the importation of fine yarn.

Above all, railway construction, even with the imported railway materials, acted as a fore-runner of growth. Infrastructural bottlenecks had been greatly removed. But, there is another story that a faithful observer of the Indian economy cannot ignore. This can be summed up in the words of the great historian Tara Chand: “Competition with imported goods destroyed the Indian industry, deprived the artisan of his income and narrowed down the avenues of employment for labour. On the other hand, the exports which came to consist of raw cotton, raw silk, food-grains, opium, indigo, and jute denuded the country of her agricultural surplus, raised the prices of raw materials and laid the foundation of future agricultural shortage and famines which held the country in their grip over the next hundred years. Foreign trade in India was, thus, an instrument of exploitation of the resources of the country and her economic enslavement”.

Direction of Trade

The dynamism in India’s foreign trade is reflected in its direction. India had a trading link mainly with Great Britain, since it retained a virtual monopoly of all the European trade. In the early years of the British rule in India, rival traders of Holland, France, and Portugal were ousted. Great Britain’s predominance in the realm of foreign trade is explained in terms of interplay of various factors.

These are: investment of British capital in various fields, the management of Indian industries through British managing agency houses, the management of railways, shipping and banking companies by the Britishers, and the policy to discriminate favouring Britain (especially after 1932) and against other trading nations, and Britain’s entre-pot trade in Indian produce which she distributed among the European trading partners. Before 1857, more than 50 p.c. of India’s trade were tied with Great Britain.

The share of Great Britain in imports and exports in 1875 were 83 p.c. and 48 p.c., respectively. Taking imports and exports as a whole, Great Britain share came to about 62 p.c. in 1875. But, Great Britain could not maintain her supremacy as time rolled on. For instance, at the close of the 19th century, Great Britain contribution to the import trade declined to 69 p.c. and to 64.2 p.c. in 1913-14.

On the other hand, the share of the Great Britain fell from 29 p.c. in the early years of the 20th century to 24 p.c. in 1913-14. Overall, the share of the Great Britain in India’s foreign trade declined from 62 p.c. to 41 p.c. in 1913-14.

The countries which gained following a declining share of England were Germany, Japan, and the United States. These countries registered commercial ties with India. As the share of Great Britain in import trade went on declining from 83 p.c. in 1875 to 64.2 p.c. in 1913-14, Germany increased her share from 2.4 p.c. to 6.9 p.c., the USA from 1.7 p.c. to 2.6 p.c., and Japan from less than half percentage point to more than two and half percentage points.

Though Britain’s share in export trade declined to 24 p.c. by 1913-14, Continental European countries were able to seize the opportunity and raised their shares to 29 p.c., the USA to 9 p.c. while Far Eastern countries witnessed a fall in share in export trade. Individually, Germany and Japan became the second and third in the list of buyers of Indian goods in 1914. However, China was pushed from second place to sixth place.

As far as imports were concerned, Great Britain again lost some ground during the World War I years, mainly owing to her preoccupation with the War. The share of the British Empire in imports declined considerably from 70 p.c. in the pre-World War I period to 54 p.c. in 1928-29.

Of these, the share of Great Britain declined from 63 p.c. to 45 p.c. over the same time period. Japan, Germany, and the USA increased their shares from 2.5 p.c. to 10.6 p.c., 6.4 p.c. to 8.1 p.c. and the USA from 3.1 p.c. to 10.2 p.c. Owing to the non-involvement of Japan and the USA in the World War I in the initial years, the control exercised upon India’s export trade and the restrictive influence of high prices then prevailing in Great Britain gave a unique opportunity to the US and Japan to emerge as growing trading partners of India.

Mainly, these countries filled up the gap left by the decline of UK’s share in Indian imports. These countries became the important suppliers of iron and steel, hardware, cotton piece goods, metallurgy, etc., which had been hitherto imported from the United Kingdom.

However, the World War I reversed the pre-war tendency at least temporarily. Unlike imports, direction of exports was also drifting away from Great Britain. The share of the British Empire in India’s exports declined from 41 p.c. in 1913-14 to 35 p.c. in 1928-29. The share of Great Britain declined also from 25 p.c. to 21 p.c. during the same time period. Though Germany’s position remained almost stationary, the USA and Japan consolidated their position.

An idea about India’s direction of trade or geographical distribution of trade for the period 1860-61 to 1940-41 can be obtained from Table 6.2.

India’s foreign trade received a great shock under the impact of the Great Depression. During the depression years, the British Empire as well as Great Britain witnessed a declining trend in their share of import. However, as far as exports from India were concerned, Great Britain and the British Empire greatly recovered their position.

The adoption of the Imperial Preference following the Ottawa Agreement in 1932 aimed at diverting Indian exports towards Great Britain and the British Empire. Though the share of Great Britain in imports into India declined from 35.5 p.c. in 1931-32 to 30.5 p.c. in 1938-39 in spite of Imperial Preference, her share in exports registered a massive increase from 44 p.c. to 54 p.c. Though Germany improved her position slightly, the comparative superiority of the USA in the share of imports was shattered.

The direction of India’s foreign trade during the Second World War was marked by the following features:

(i) Gradual eclipse of Great Britain share;

(ii) But gradual increase in the share of the Empire countries;

(iii) Eclipse of Germany and Japan in the Indian market; and

(iv) A rise in trade with the USA, Middle East, and the Far East.

Anyway, the geographical distribution of trade that had changed over time resulting in an alternating rise and fall of one or two countries must be attributed to the changes in the commodity composition of trade. With the emergence of new exports and imports following industrialisation as well as reorientation of the agricultural sector, we saw countries like USA and Japan to emerge as the growing trading partners.

As Great Britain lost her comparative advantage in the export and import trade, other countries established their superiority, though the overall share of the British Empire was too large since India was the most lucrative colony of England. Monopoly position in trade explained her superiority.

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.

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)