Tag: Business Environment

The establishment of the World Trade Organization (WTO) as the successor to ,the GATT on 1 January 1995 under the Marrakesh Agreement places the global trading system on a firm constitutional footing with the evolution of international economic legislation resulted through the Uruguay Round of GATT negotiations.

A remarkable feature of the Uruguay Round was that it paved the way for further liberalization of international trade with the fundamental shift from the negotiation approach to the institutional framework envisaged through transition from GATT to WTO Agreement.

The GATT 1947 and the WTO co-existed for the transitional period of one year in 1994. In January 1995, however, the WTO completely replaced the GATT. The membership of the WTO increased from 77 in 1995 to 127 by the end of 1996.

Structure of the World Trade Organization (WTO)

The organizational structure of the WTO is outlined in the Chart 1.

The Ministerial Conference (MC) is at the top of the structural organization of the WTO. It is the supreme governing body which takes ultimate decisions on all matters. It is constituted by representatives of (usually, Ministers of Trade) all the member countries.

The General Council (GC) is composed of the representatives of all the members. It is the real engine of the WTO which acts on behalf of the MC. It also acts as the Dispute Settlement Body as well as the Trade Policy Review Body.

There are three councils, viz.: the Council for Trade in Services and the Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS) operating under the GC. These councils with their subsidiary bodies carry out their specific responsibilities

Further, there are three committees, viz., the Committee on Trade and Development (CTD), the Committee on Balance of Payments Restrictions (CBOPR), and the Committee on Budget, Finance and Administration (CF A) which execute the functions assigned to them by e WTO Agreement and the GC.

The administration of the WTO is conducted by the Secretariat which is headed by the Director General (DG) appointed by the MC for the tenure of four years. He is assisted by the four Deputy Directors from different member countries. The annual budget estimates and financial statement of the WTO are presented by the DG to the CBFA for review and recommendations for the final approval by the GC.

Functions of the World Trade Organization (WTO)

The WTO consisting a multi-faced normative framework: comprising institutional substantive and implementation aspects.

The major functions of the WTO are as follows:

1. To lay-down a substantive code of conduct aiming at reducing trade barriers including tariffs and eliminating discrimination in international trade relations.
2. To provide the institutional framework for the administration of the substantive code which encompasses a spectrum of norms governing the conduct of member countries in the arena of global trade.
3. To provide an integrated structure of the administration, thus, to facilitate the implementation, administration and fulfillment of the objectives of the WTO Agreement and other Multilateral Trade Agreements.
4. To ensure the implementation of the substantive code.
5. To act as a forum for the negotiation of further trade liberalization.
6. To cooperate with the IMF and WB and its associates for establishing a coherence in trade policy-making.
7. To settle the trade-related disputes.

Features of the WTO

The distinctive features of the WTO are:

(i) It is a legal entity

(ii) World Bank (WB) it is not an agent of the United Nations.

(iii) Unlike the IMF and the World Bank, there is no weighted voting, but all the WTO members have equal rights.

(iv) Unlike the GATT, the agreements under the WTO are permanent and binding to the member countries.

(v) Unlike the GATT, the WTO dispute settlement system is based not on dilatory but automatic mechanism. It is also quicker and binding on the members. As such, the WTO is a powerful body.

(vi) Unlike the GATT, the WTOs approach is rule- based and time-bound.

(vii) Unlike the GATT, the WTOs have a wider coverage. It covers trade in goods as well as services.

(viii) Unlike the GATT, the WTOs have a focus on trade-related aspects of intellectual property rights and several other issues of agreements.

(ix) Above all, the WTO is a huge organizational body with a large secretariat.

Objectives of the WTO

The purposes and objectives of the WTO are spelled out in the preamble to the Marrakesh Agreement.

In a nutshell, these are:

1. To ensure the reduction of tariffs and other barriers to trade.
2. To eliminate discriminatory treatment in international trade relations.
3. To facilitate higher standards of living, full employment, a growing volume of real income and effective demand, and an increase in production and trade in goods and services of the member nations.
4. To make positive effect, which ensures developing countries, especially the least developed secure a level of share in the growth of international trade that reflects the needs of their economic development.
5. To facilitate the optimal use of the world’s resources for sustainable development.
6. To promote an integrated, more viable and durable trading system incorporating all the resolutions of the Uruguay Round’s multilateral trade negotiations.

Above all, to ensure that linkages trade policies, environmental policies with sustainable growth and development are taken care of by the member countries in evolving a new economic order.

SWOT Analysis is a strategic planning tool used to identify an organization’s internal strengths and weaknesses, as well as external opportunities and threats. It involves assessing factors within the organization’s control, such as resources, capabilities, and processes, to determine competitive advantages and areas needing improvement. Additionally, SWOT analysis evaluates external factors like market trends, competitor actions, and regulatory changes to uncover potential avenues for growth and challenges to address. By synthesizing this information, organizations can develop strategies to capitalize on strengths, mitigate weaknesses, exploit opportunities, and defend against threats, ultimately enhancing their competitive position and guiding decision-making processes.

Elements of a SWOT analysis

1. Strengths:

Internal attributes and resources that give the organization a competitive advantage. These can include factors such as strong brand reputation, skilled workforce, proprietary technology, efficient processes, and financial stability.

2. Weaknesses:

Internal factors that place the organization at a disadvantage compared to competitors. Weaknesses may include areas such as limited resources, outdated technology, poor brand perception, inefficient processes, and lack of expertise or talent.

3. Opportunities:

External factors or trends in the business environment that the organization could exploit to its advantage. Opportunities may arise from market growth, emerging trends, technological advancements, changes in consumer preferences, or regulatory changes.

4. Threats:

External factors that could negatively impact the organization’s performance or pose risks to its success. Threats may come from factors such as intense competition, economic downturns, changing regulatory landscapes, disruptive technologies, or shifts in consumer behavior.

Factors affecting SWOT Analysis:

• Scope and Objectives:

Clearly defining the scope and objectives of the analysis ensures that relevant factors are considered and that the analysis remains focused on its intended purpose.

• Data Quality:

The accuracy and reliability of the data used in the analysis directly impact the validity of the findings. Using up-to-date, accurate, and comprehensive data sources is essential.

• Perspective and Bias:

Different stakeholders may have varying perspectives and biases that influence their perception of the organization’s strengths, weaknesses, opportunities, and threats. It’s crucial to consider multiple viewpoints to ensure a balanced analysis.

• Expertise and Knowledge:

The expertise and knowledge of the individuals conducting the analysis can affect the depth and insightfulness of the findings. Involving individuals with diverse backgrounds and expertise can enhance the quality of the analysis.

• External Environment:

Changes in the external business environment, such as market trends, competitor actions, regulatory changes, economic conditions, and technological advancements, can impact the validity of the analysis. Regularly updating the analysis to reflect changes in the external environment is essential.

• Internal Dynamics:

Internal factors such as organizational culture, leadership, resource allocation, and decision-making processes can influence the identification of strengths, weaknesses, opportunities, and threats. Understanding internal dynamics is crucial for conducting a realistic SWOT analysis.

• Interrelationships:

Recognizing the interrelationships between different elements of the SWOT analysis is important for understanding how they interact and influence each other. For example, addressing a weakness may create opportunities, or exploiting an opportunity may mitigate a threat.

• Time Constraints:

Time constraints can limit the depth and thoroughness of the analysis. It’s essential to allocate sufficient time and resources to conduct a comprehensive SWOT analysis effectively.

Benefits of SWOT Analysis:

• Strategic Planning:

SWOT analysis provides a structured framework for organizations to assess their internal strengths and weaknesses, as well as external opportunities and threats. This information is invaluable for strategic planning, helping organizations align their resources and capabilities with their goals and objectives.

• Improved Decision Making:

By identifying key factors influencing the organization’s performance and competitive position, SWOT analysis enables informed decision making. It helps organizations prioritize initiatives, allocate resources effectively, and capitalize on opportunities while mitigating potential risks.

• Enhanced Competitive Positioning:

Understanding the organization’s strengths and weaknesses relative to competitors, as well as market opportunities and threats, enables organizations to develop strategies to enhance their competitive positioning. SWOT analysis helps organizations identify unique selling points, differentiate themselves in the market, and capitalize on competitive advantages.

• Risk Management:

By identifying potential threats and weaknesses, SWOT analysis helps organizations anticipate risks and develop strategies to mitigate them. It enables proactive risk management, reducing the likelihood of negative impacts on the organization’s performance and reputation.

• Facilitates Change Management:

SWOT analysis provides valuable insights into the internal and external factors affecting the organization, making it a useful tool for change management initiatives. It helps organizations anticipate resistance to change, identify areas requiring improvement, and develop strategies to overcome barriers to change.

• Enhanced Communication and Alignment:

SWOT analysis fosters communication and alignment within the organization by providing a common understanding of the organization’s strengths, weaknesses, opportunities, and threats. It facilitates collaboration among stakeholders, promotes transparency in decision making, and ensures that everyone is working towards common goals and objectives.

International trade allows countries to expand their markets for both goods and services that otherwise may not have been available domestically. As a result of international trade, the market contains greater competition, and therefore more competitive prices, which brings a cheaper product home to the consumer.

International trade gives rise to a world economy, in which supply and demand, and therefore prices, both affect and are affected by global events. Political change in Asia, for example, could result in an increase in the cost of labor, thereby increasing the manufacturing costs for an American sneaker company based in Malaysia, which would then result in an increase in the price charged at your local mall. A decrease in the cost of labor, on the other hand, would likely result in you having to pay less for your new shoes.

A product that is sold to the global market is called an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.

Theories of International Trade

Mercantilism

According to Wild, 2000, the trade theory that state that nations ought to accumulate money wealth, typically within the style of gold, by encouraging exports and discouraging imports is termed mercantilism. In line with this theory different measures of countries’ well being, like living standards or human development, area unit tangential mainly Great britain, France, Holland, Portuguese Republic and Spain used mercantilism throughout the 1500s to the late 1700s.

Mercantilistic countries experienced the alleged game, that meant that world wealth was restricted which countries solely may increase their share at expense of their neighbours. The economic development was prevented once the mercantilistic countries paid the colonies very little for export and charged them high value for import. The most downside with mercantilism is that every one country engaged in export however was restricted from import, another hindrance from growth of international trade.

Absolute Advantage

The Scottish social scientist Smith developed the trade theory of absolute advantage in 1776. A rustic that has associate absolute advantage produces larger output of a decent or service than different countries mistreatment an equivalent quantity of resources. Smith declared that tariffs and quotas mustn’t limit international trade it ought to be allowed to flow in step with economic process. Contrary to mercantilism Smith argued that a rustic ought to focus on production of products within which it holds associate absolute advantage. No country then ought to turn out all the products it consumed. The speculation of absolute advantage destroys the mercantilistic concept that international trade could be a game. In step with absolutely the advantage theory, international trade could be a positive-sum game, as a result of there are gains for each countries to associate exchange. In contrast to mercantilism this theory measures the nation’s wealth by the living standards of its folks and not by gold and silver.

There’s a possible drawback with absolute advantage. If there’s one country that doesn’t have associate absolute advantage within the production of any product, can there still be profit to trade, and can trade even occur. The solution is also found within the extension of absolute advantage, the speculation of comparative advantage.

Comparative Advantage

The most basic idea within the whole of international trade theory is that the principle of comparative advantage, first introduced by economist David Ricardo in 1817. It remains a serious influence on a lot of international foreign policy and is thus necessary in understanding the fashionable international economy. The principle of comparative advantage states that a rustic ought to specialize in manufacturing and exportation those merchandise during which is includes a comparative, or relative price, advantage compared with different countries and will import those merchandise during which it’s a comparative disadvantage. Out of such specialization, it’s argued, can accrue larger profit for all.

During this theory there square measure many assumptions that limit the real-world application. The idea that countries square measure driven solely by the maximization of production and consumption and not by problems out of concern for employees or customers may be a mistake.

Heckscher-Ohlin theory

In the early decade a world trade theory referred to as issue proportions theory emerged by two Swedish economists, Eli Heckscher and Bertil Ohlin. This theory is additionally referred to as the Heckscher-Ohlin theory. The Heckscher-Ohlin theory stress that countries ought to turn out and export merchandise that need resources that area unit well endowed and import merchandise that need resources in brief provide. This theory differs from the theories of comparative advantage and absolute advantage since these theory focuses on the production of the assembly method for a selected smart. On the contrary, the Heckscher-Ohlin theory states that a rustic ought to specialize production and export victimization the factors that area unit most well endowed, and so the most cost effective. Not turn out, as earlier theories declared, the products it produces most expeditiously.

The Heckscher-Ohlin theory is most well-liked to the Ricardo theory by several economists, as a result of it makes fewer simplifying assumptions. In 1953, economic expert revealed a study, wherever he tested the validity of the Heckscher-Ohlin theory. The study showed that the U.S was additional well endowed in capital compared to alternative countries, thus the U.S would export capital- intensive merchandise and import labor-intensive merchandise. Wassily Leontief observed that the U.S’s export was less capital intensive than import.

Modern or Firm-Based Trade Theories

In contrast to classical, country-based trade theories, the category of modern, firm-based theories emerged after World War II and was developed in large part by business school professors, not economists. The firm-based theories evolved with the growth of the multinational company (MNC). The country-based theories couldn’t adequately address the expansion of either MNCs or intraindustry trade, which refers to trade between two countries of goods produced in the same industry. For example, Japan exports Toyota vehicles to Germany and imports Mercedes-Benz automobiles from Germany.

Unlike the country-based theories, firm-based theories incorporate other product and service factors, including brand and customer loyalty, technology, and quality, into the understanding of trade flows.

(i) Country Similarity Theory

Swedish economist Steffan Linder developed the country similarity theory in 1961, as he tried to explain the concept of intraindustry trade. Linder’s theory proposed that consumers in countries that are in the same or similar stage of development would have similar preferences. In this firm-based theory, Linder suggested that companies first produce for domestic consumption. When they explore exporting, the companies often find that markets that look similar to their domestic one, in terms of customer preferences, offer the most potential for success. Linder’s country similarity theory then states that most trade in manufactured goods will be between countries with similar per capita incomes, and intraindustry trade will be common. This theory is often most useful in understanding trade in goods where brand names and product reputations are important factors in the buyers’ decision-making and purchasing processes.

(ii) Product Life Cycle Theory

Raymond Vernon, a Harvard Business School professor, developed the product life cycle theory in the 1960s. The theory, originating in the field of marketing, stated that a product life cycle has three distinct stages: (1) new product, (2) maturing product, and (3) standardized product. The theory assumed that production of the new product will occur completely in the home country of its innovation. In the 1960s this was a useful theory to explain the manufacturing success of the United States. US manufacturing was the globally dominant producer in many industries after World War II.

It has also been used to describe how the personal computer (PC) went through its product cycle. The PC was a new product in the 1970s and developed into a mature product during the 1980s and 1990s. Today, the PC is in the standardized product stage, and the majority of manufacturing and production process is done in low-cost countries in Asia and Mexico.

The product life cycle theory has been less able to explain current trade patterns where innovation and manufacturing occur around the world. For example, global companies even conduct research and development in developing markets where highly skilled labor and facilities are usually cheaper. Even though research and development is typically associated with the first or new product stage and therefore completed in the home country, these developing or emerging-market countries, such as India and China, offer both highly skilled labor and new research facilities at a substantial cost advantage for global firms.

(iii) Global Strategic Rivalry Theory

Global strategic rivalry theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kelvin Lancaster. Their theory focused on MNCs and their efforts to gain a competitive advantage against other global firms in their industry. Firms will encounter global competition in their industries and in order to prosper, they must develop competitive advantages. The critical ways that firms can obtain a sustainable competitive advantage are called the barriers to entry for that industry. The barriers to entry refer to the obstacles a new firm may face when trying to enter into an industry or new market. The barriers to entry that corporations may seek to optimize include:

• Research and development,
• The ownership of intellectual property rights,
• Economies of scale,
• Unique business processes or methods as well as extensive experience in the industry, and
• The control of resources or favorable access to raw materials.

(iv) Porter’s National Competitive Advantage Theory

In the continuing evolution of international trade theories, Michael Porter of Harvard Business School developed a new model to explain national competitive advantage in 1990. Porter’s theory stated that a nation’s competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. His theory focused on explaining why some nations are more competitive in certain industries. To explain his theory, Porter identified four determinants that he linked together. The four determinants are, local market resources and capabilities, local market demand conditions, local suppliers and complementary industries, and local firm characteristics.

• Local market resources and capabilities (factor conditions). Porter recognized the value of the factor proportions theory, which considers a nation’s resources (e.g., natural resources and available labor) as key factors in determining what products a country will import or export. Porter added to these basic factors a new list of advanced factors, which he defined as skilled labor, investments in education, technology, and infrastructure. He perceived these advanced factors as providing a country with a sustainable competitive advantage.
• Local market demand conditions. Porter believed that a sophisticated home market is critical to ensuring ongoing innovation, thereby creating a sustainable competitive advantage. Companies whose domestic markets are sophisticated, trendsetting, and demanding forces continuous innovation and the development of new products and technologies. Many sources credit the demanding US consumer with forcing US software companies to continuously innovate, thus creating a sustainable competitive advantage in software products and services.
• Local suppliers and complementary industries. To remain competitive, large global firms benefit from having strong, efficient supporting and related industries to provide the inputs required by the industry. Certain industries cluster geographically, which provides efficiencies and productivity.
• Local firm characteristics. Local firm characteristics include firm strategy, industry structure, and industry rivalry. Local strategy affects a firm’s competitiveness. A healthy level of rivalry between local firms will spur innovation and competitiveness.

In addition to the four determinants of the diamond, Porter also noted that government and chance play a part in the national competitiveness of industries. Governments can, by their actions and policies, increase the competitiveness of firms and occasionally entire industries.

Porter’s theory, along with the other modern, firm-based theories, offers an interesting interpretation of international trade trends. Nevertheless, they remain relatively new and minimally tested theories.

Once our economy opened up post liberalization and globalization, the import and export industry became a huge sector in our economy. Even today India is one of the largest exporters of agricultural goods. So to provide financial support to importers and exporters the government set up the EXIM Bank.

EXPORT AND IMPORT BANK OF INDIA (EXIM)

The Export and Import Bank of India, popularly known as the EXIM Bank was set up in 1982. It is the principal financial institution in India for foreign and international trade. It was previously a branch of the IDBI, but as the foreign trade sector grew, it was made into an independent body.

The main function of the Export and Import Bank of India is to provide financial and other assistance to importers and exporters of the country. And it oversees and coordinates the working of other institutions that work in the import-export sector. The ultimate aim is to promote foreign trade activities in the country.

The management of the EXIM bank is done by a board, headed by the Managing Director. There are 17 other Directors on the board. The whole paid-up capital of the bank (100 crores currently) is subscribed by the Central Government exclusively.

Functions of the EXIM Bank

Let us take a look at some of the main functions of Export and Import Bank of India bank:

1. Finances import and export of goods and services from India.
2. It also finances the import and export of goods and services from countries other than India.
3. It finances the import or export of machines and machinery on lease or hires purchase basis as well.
4. Provides refinancing services to banks and other financial institutes for their financing of foreign trade.
5. EXIM bank will also provide financial assistance to businesses joining a joint venture in a foreign country.
6. The bank also provides technical and other assistance to importers and exporters. Depending n the country of origin there are a lot of processes and procedures involved in the import-export of goods. The EXIM bank will provide guidance and assistance in administrative matters as well.
7. Undertakes functions of a merchant bank for the importer or exporter in transactions of foreign trade.
8. Will also underwrite shares/debentures/stocks/bonds of companies engaged in foreign trade.
9. Will offer short-term loans or lines of credit to foreign banks and governments.
10. EXIM bank can also provide business advisory services and expert knowledge to Indian exporters in respect of multi-funded projects in foreign countries

Importance of the EXIM Bank

Other than providing financial assistance, the Export and Import Bank of India bank is always looking for ways to promote the foreign trade sector in India. In the early 1990s, EXIM introduced a program in India known as the Clusters of Excellence.

The aim was to improve the quality standards of our imports and exports. It also has a tie-up with the European Bank for Reconstruction and Development. It has agreed to co-finance programs with them in eastern Europe.

In order to promote exports EXIM bank also has schemes such as production equipment finance program, export marketing finance, vendor development finance, etc.

ECGC (Export Credit Guarantee Corporation of India)

The ECGC Limited (Formerly Export Credit Guarantee Corporation of India Ltd) is a company wholly owned by the Government of India based in Mumbai, Maharashtra. It provides export credit insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks Insurance Corporation (ERIC) in July 1957. It was transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit Guarantee Corporation of India in 1983.

Functions of ECGC

• Provides a range of credit risk insurance covers to exporters against loss in export of goods and services as well.
• Offers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them.
• Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan and advances.

Facilities by ECGC

• Offers insurance protection to exporters against payment risks
• Provides guidance in export-related activities
• Makes available information on different countries with its own credit ratings
• Makes it easy to obtain export finance from banks/financial institutions
• Assists exporters in recovering bad debt
• Provides information on credit-worthiness of overseas buyers

Institutions in Financing of Foreign Trade

Business activities are conducted on a global level and even between nations. There is an emergence of global markets. To keep the trade fair and manage trade-related issues on a global level, various International Institutions and Trade Agreements were established.

International Trade Associations

The nations were influenced financially because of World War 1 and World War 2. The reconstruction couldn’t happen as there was an interruption in the financial system furthermore there was a shortage of resources. At this crossroads, the prominent economist J. M. Keynes with Bretton Woods establish an association with 44 countries to meet this and to reestablish commonship on the planet.

This gathering brought forth the International Monetary Fund (IMF) International bank Of Reconstruction and Development (IBRD) and the International Trade Organization (ITO). These three associations were considered as three columns for the improvement of the global economy.

World Bank

The International Bank of Reconstruction and Development (IBRD) is usually known as the World Bank. The fundamental point of IBRD is to remake the war influenced the economies of Europe and help the improvement of underdeveloped economies of the world. The World Bank after 1950 focused more on financially unstable nations and invested heavily into social segments like health and education of such immature nations.

Currently, the World Bank includes five universal bodies responsible for offering fund to various countries. These bodies and its partners are headquartered in Washington DC taking into account diverse financial requirements and necessities.

As specified before, the World Bank has been allocated the undertaking of financial development and expanding the extent of the international business. Amid its underlying years of foundation, it gave more significance on creating facilitates like transportation, health, energy and others.

This has profited the underdeveloped nations too, without doubt, however, because of poor regulatory structure, the absence of institutional system and absence of accessibility of skilled labour in these nations has prompted disappointment. World Bank and its Affiliates Institutions:

• International Bank for Reconstruction and Development (IBRD) 1945
• International Financial Corporation (IFC) 1956
• Multilateral Investment Guarantee Agency (MIGA) 1988
• International Development Association (IDA) 1960
• International Centre for Settlement of Investment Disputes (ICSID) 1966

The World Bank is no longer limited to simply offering money related help for infrastructure development, agriculture, industry, health and sanitation. It is somewhat significantly engaged with regions like reducing rural poverty, increasing income of the rural poor, offering specialized help, and beginning research schemes.

International Development Association (IDA)

International Development Association (IDA) was set up in 1960 as a partner of the World Bank. IDA was set up essentially to offer fund to the less developed countries on a soft loan basis. It is because of its intention of providing soft loans that it is called the Soft Loan Window of the IBRD. The objectives of IDA are as follows,

• To help the underdeveloped countries by giving loans in simple terms.
• Help at the end of poverty in the poorest nations
• Give macroeconomics services such as, for example, those relating to health, nutrition, education, human resource advancement and control of the population.
• To offer loans at marked down interests in order to energize economic development, the increment in manufacturing limit and good expectations for standard of living in the underdeveloped nations.

International Finance Corporation (IFC)

Established in July 1956, IFC was aimed to assist in terms of finance to the private sector of developing nations. IFC is also an associate of the World Bank, but it has its own separate legal entity, functions and funds. All the members of the World Bank are entitled to become members of IFC.

Multinational Investment Guarantee Agency (MIGA)

Established in April 1988, The Multinational Investment Guarantee Agency’s aim was to support the task of the World Bank and IFC. Some objectives of the MIGA are:-

• Advance the stream of direct foreign investment into less developed member countries.
• Give protection cover to fund supplier against political risks.
• Guarantee extension of current investment, privatization and economic reconstruction.
• Provide assurance against noncommercial perils, for example, dangers engaged in currency transfer, war and domestic clashes, and infringement of agreement.

The global economy has been on a subdued growth path since the advent of ‘Financial Crisis’ of 2008, and has now started to show signs of global recovery. In October 2017, the IMF projected world GDP growth to pick up from 3.2% in 2016 to 3.6% in 2017, and further to 3.7% in 2018. Economic activity has also picked up in developed market economies such as the US, UK, and Europe. There is a rise in global demand, which is expected to remain buoyant. The developing and emerging market economies have seen mixed economic performance. The pickup in momentum of global demand has been led by investment demand. More specifically, production of both consumer durables and capital goods have rebounded since the second half of 2016. Some factors that have contributed to these developments include global recovery in investments, led by infrastructure and real estate investment in China; firming global commodity prices; and end of an inventory cycle in US.

On the back of this global recovery, the world is witnessing a pickup in global trade. The Asian Development Bank, in its recent update1, noted that most of the emerging economies (excluding China) are witnessing a rebound in manufacturing exports, “particularly in electronics, where foreign direct investment has been strengthening”. The economies of south-east Asia are also gaining from increased activity along cross-border manufacturing supply chains. The World Trade Organization (WTO), has recently in its September 2017 press release upgraded the growth forecast for global trade in the year 2017, from 2.4% to 3.6%. Particularly, in the first half of 2017, world trade rose by a robust 4.2% (year on year), driven by exports of developing economies which grew by 5.9 percent as compared to a growth of 3.1 percent witnessed in exports of developed economies. Imports by developed and developing economies also increased by 2.1% and 6.9%, respectively. Moreover, the ratio of trade growth to world GDP growth is also set to recover and reach around 1.3, which will be at a highest level in last 5 years.

This pickup in global growth which has boosted demand for imports, spurred intra-Asia-trade as demand was transmitted through global value chains. In this current scenario, even though India is witnessing a mild rebound in its exports, there are concerns that merchandise exports in Asia’s second largest economy are lagging behind other major Asian economies. Today global attention is riveted on emerging and developing economies and especially Asia, driven by the continent’s growing appetite for industrial investment, burgeoning infrastructural requirements and its quest for expanding trade.

Indian economy and its trade scenario

India’s growth story, especially since the start of the 21st century has been remarkable. The Indian economy has come a long way since its economic liberalisation, and is amongst the fastest growing major economies of the world today. While India witnessed a relatively moderate growth during the period 2011-12 to 2013-14, on account of the global economic slowdown, the economy recorded a robust growth averaging 7.5 percent during the period 2014-15 to 2016-17, much above the growth rate of other emerging and developing economies. In the last one year, it has seen major economic policy developments with the introduction of Goods and Services Tax (GST) and demonetization of higher currency notes.

Even though the GDP growth in the first quarter of current fiscal has fallen down to a low of 5.7%, its lowest since March 2014, it is widely believed that the economy has bottomed out and it can only rise from here. According to the IMF, India is expected to grow at 7.2% in this fiscal year, aided by higher government spending and a pickup in the service sector performance.

Fueling India’s growth through international trade

In recent years, India’s robust growth has been driven by the dynamic private sector. An encouraging phenomenon that has been witnessed has been the emergence of a large number of investment driven small and medium enterprises with immense potential for growth. A large number of such enterprises have also endeavoured to expand their business operations overseas. The Indian economy is more globalized than we could imagine. As a result, India’s foreign trade has seen a multi-fold increase, since liberalization of the economy.

Accordingly, there have been significant structural shifts not only in the product basket, but also in the geographical composition of India’s foreign trade. The opening up of Indian economy led to a massive increase in the foreign trade, which aided in sustained GDP growth over last two decades. During the last 25 years Indian exports have increased by 17 times and imports by 19 times. India’s share in global merchandise exports has risen from 0.6 percent in early 1990s to 1.7 percent in 2016, and similarly the share of imports has risen from 0.6 percent to 2.4 percent during the same period. India’s trade to GDP ratio, a measure of an economy’s openness and integration into the global economy, has witnessed a phenomenal increase over the last few decades. Foreign trade which constituted around 13-15 percent of India’s GDP in the early nineties, peaked at 55 percent in 2012- 13 and today accounts for around 40 percent in 2016-17. India also, ranked as the 20th largest exporter and 14th largest importer in the world in 2016.

Concomitantly, India’s engagement with Global Value Chains (GVCs), which have become dominant feature of world trade, has increased significantly since 1990s. In manufacturing sector, especially for electrical and optical equipment, India is more integrated with the south east Asian region, while for services the integration in GVCs is with western countries like the US and UK. According to an OECD estimate, developing economies with fastest growing GVC participation have experienced a GDP per capita growth rate percent above average.

India has set an ambitious target of achieving exports worth US $ 900 billion by 2020, while accounting for a share of 3.5 percent of global exports4. In the current global macroeconomic scenario, while it seems like a challenging task, concerted efforts would need to be made for India to be able to achieve its trade target and realign its foreign trade policy with the new global trading system.

While the global economic scenario is crucial, the domestic factors are no less important, when it comes to trade. India’s overall trade policy faces certain challenges viz. inadequate export diversification in terms of products and geographical distribution; insignificant involvement of a majority of states in exports; rationalisation of the tariff regime and export promotion schemes; and factor market reforms which are critically linked with export performance. These challenges not only affect the productivity and competitiveness of domestic firms but also restrict them from participating in global production networks.

(i) Integrating into and moving up the value chain

Most manufactured products, often high technology manufactured products, that are part of GVCs are infrastructure critical products whose parts are manufactured in several countries. A robust transport and connectivity network supported by fast entry/exit through port/customs is a precondition to making such products as delay may disrupt the entire value chain. There is a need for India to focus on expanding production capacity along with value addition, and moving up the value chain,while creating an enabling environment to account for a sizeable share in major leading global exports. This gain seven more significance given that India’s labour force is projected to swell by about 110 mn by 2020. The biggest challenge is to employ the surplus labour coming out of agriculture into industry and services.

(ii) Upscaling Manufacturing

The Make in India initiative is an important initiative of the Government of India, which envisages to promote India as a manufacturing hub and investment destination. There is need for highlighting the potential and stimulating the manufacturing sector through supporting mechanisms and conducive policy measures, including support for R&D, technology orientation and investment incentives. A Higher expenditure on R&D generally correlates with increase in high-technology exports, and increased local value addition. R&D expenditure as a percentage share of GDP in India has remained extremely low at less than1 percent, much lower even in comparison to other developing economies. Also, while we lay emphasis on the manufacturing sector and thereby on manufactured exports, it is also important to ensure an enabling environment and improving our competitiveness by investing in infrastructure such as better connectivity through roads and ports, coal availability, labour reforms and flexibility in factor markets.

(iii) Aligning India’s Export Capability in-Line with Global Import Demand

With regard to India’s exports, while merchandise exports have more than doubled over the period 2006-07 to 2016-17 from US$ 126 billion to more than US$276 billion, there remains huge potential for exports of select products to select countries in line with India’s export capability and import demand. There is need for identifying and aligning India’s export capability vis-à-vis global import demand. Such in-depth analysis has been the focus of research studies in Exim Bank. Comparative analyses of global trends in trade, undertaken in such studies have yielded interesting results.

To Conclude

All in all, a pick-up in global growth is expected to contribute to the revival of international trade, but the downside risks such as the possible adoption of protectionist trade policies by especially developed market economies, around the world weigh on the recovery of trade. As a result, there is an increasing need for India and other emerging market economies, relying on export led economic growth, to take a proactive stand for globalization and international trade.

There is a need to shift our focus from exporting what we can (or supply based), to items that are globally demanded. A demand-based export basket diversification approach could give a big push to exports. While India has made remarkable progress in the recent past, it facesan even more challenging global environment today. Itis certainly a daunting, yet possible, task to ensure that India repositions itself as an important driver of global economic growth.