TRADE FOREIGN

Constraints arising from foreign trade and import substitution based

policies
INDIAN economic development strategy, particularly relating to
industrialisation has been driven by perceived foreign exchange scarcities and
the desire to ensure that scarce foreign exchange is used only for purposes
deemed ‘essential‘ from the perspective of development. Industrialization and
self-sufficiency in essential commodities have been important objectives of
policy because of the fear that dependence on other. More powerful countries,
for imports of essential commodities would lead to political dependence on
them as well. Nearly a decade before independence, in 1938, the national
planning committee was set up by the Indian national congress (the political
party that led the struggle for independence) under the chairmanship of the
future prime minister Jawaharlal Nehru. This committee viewed, “… the
objective for the country as a whole was the attainment, as far as possible of
economic imperialism, “
Later the first-year plan went further:
“Control and regulation of exports and imports, and in the case of certain
select commodities state trading, are necessary not only from the point of view
of utilizing to the best advantage the limited foreign exchange resources
available but also for securing an allocation of the productive resources of the
country in line with the targets defined in the plan.”
INWARD looking strategy
India adopted an ‘inward looking’ strategy of industrialisation. This strategy
relied on encouraging domestic production for the domestic market behind high
tariffs and high degree of effective protection to the domestic industry. This
resulted in an uncompetitive domestic industrial structure. T.N. Srinivasan has
argued that the development strategy based on import substituting
industrialisation and the system of controls that were implemented failed to
produce rapid growth, self-reliance, and eradication of poverty, but instead led
to lacklustre growth, an internationally uncompetitive industrial structure. A
perpetually precarious balance of payments, and. above all, rampant rent
seeking and the corruption of social, economic and political systems.
Far from viewing foreign trade as an engine of growth, Indian planners
sought to minimise import demand and viewed exports more or less as a
necessary evil mainly to generate the foreign exchange earnings to meet that
part of the import bill not covered by external assistance. They created an
elaborate administrative regulatory machinery in an attempt to control
investment and resource allocation in the economy and ensure their consistency
with five-year plan targets. Controls over imports and exports were also part of
this regulatory system.

Broad trends: export and imports

Exports
1. 1950 to early 70s - Import substitution became the keystone of
development strategy in the late 1950s. consequently. Exports were
neglected by the government. The value of exports as a percentage of
GDP at market prices declined from an average of over 6 per cent (1950-
5) to 1955-56) to less than 4 per cent in the period following this
declining trend in the value of exports continues till 971-72 (table 23 .1).
the decline in spite of the introduction of many incentive schemes for
exporters in the sixties. The sixties can be seen as the period of induction
of export orientation through incentive schemes for exports along with
import substitution. With the decision to devalue the rupee in 1966,
change in tariffs and export subsidy policy, it was evident that the policy-
makers
Were trying to use fiscal measures to step up exports and curb imports. But, the
incentives given to exporters could not offset the bias against exports which was
implicit in the over valued exchange rate except for 1966 devaluation) and the
prevalent level of import restrictions.

2. Early 70s to late 80s – the value of exports as a percentage of GDP at market
prices picked up after 1971-72 and increased till end seventies. Eighties again
shows a declining trend in value of exports with a recovery to over 6 per cent
level only in the last couple of year in eighties (table 23.2). it was realised after
the first oil shock of 1973 that India had to step up exports simply to finance the
rising import bill on account of an increase in oil prices.
Eighties can be viewed as a period of growing uneasiness with the policies of
excessive protectionism. The Abid Hussain committee on import and export
policies (1985-1988) recommended more liberal access to imports by exporters.
The second major recommendation of the committee was that the real exchange
rate of the rupee should not be allowed to appreciate and it should be
maintained at a level considered appropriate for ensuring the competitiveness of
exports.
3. 1990s - The 1990s have witnessed an increase in the value of exports as a
percentage of GDP at market price to over 8 per cent from over 6 per cent level
(table 23.3). after the payment crisis of 1990-91 , when the foreign exchange
reserves had s, fallen drastically and were enough to pay for two weeks of
imports, the process of economic reforms was started in 1991, the chief
elements of reforms are devaluation of the rupee, liberalisation of import
licensing , reduction in tariffs, abolition of cash subsidies for export
introduction of partial convertibility of the rupee on the current account and
later full convertibility of the rupee on the current account .
After three successive years of robust growth at an annual average of 19.7 per
cent (in US Dollars) during 1993-94 to 1995-96, export momentum slowed
down since 1996-97, with exports registering a modest growth of 5.3 per cent
and decelerating further to 1.5 per cent in 1997-98. both global and domestic
factors have contributed to the slowdown in export growth in India since 1996-
97. The share of east Asian countries in Indian exports was around one-sixth
before the crisis, India could not escape the fallout from the import compression
in these Countries, the slump in global trade and continued recessionary phase
has caused not only import contraction but has also triggered protectionist
measures. Amongst the domestic factors that continue to hamper exports
infrastructure constraints, high transaction costs, SSI reservations, labour
inflexibility, quality problems and quantitative ceilings on agricultural exports
remain problematic. the growth of exports picked up in 1999-2000 and 2000-
2001.
India’s merchandise exports (in dollar terms and customs basis), by continuing
to grow at over 20 per cent year in the last 3 year since 2002-03, have surpassed
highest since 1975-76, export growth was a record if 26.2 per cent, the highest
since 1975-76 and the second highest since 1950-51. Supported by a buoyant
world economy (5.1per cent). The good performance of exports (growth of 18.9
per cent) continued in April – January 2005-06, despite the slightly subdued
growth of global demand, and floods and transport disruptions in the export
nerve centres of Mumbai and Chennai.

FACTORS FOR EXPORT GROWTH SINCE 2002-03

Both external and domestic factors have contributed to the satisfactory
performance of exports since 2002-03. While improved global growth and
recovery in world trade aided the strengthening of Indian exports, firming up of
domestic economic activity, especially in the manufacturing sector, also
provided a supporting base for strong sector-specific exports. Various policy
initiatives for export promotion and market diversification seem to have
contributed as well. the opening up of the economy and corporate restructuring
have enhanced the competitiveness of Indian industry. infect India's impressive
export growth has exceeded world export growth in most of the years since
1995; but, since 2003, it has lagged behind the export growth of developing
countries taken together, mainly because of China’s explosive export growth.
India’s share in world merchandise exports, after rising from 0.5 per cent in
1990 to 0.8 per cent in 2003, has been stagnating at that level since then with
marginal variation at the second decimal place (Table 23.5). This is a cause for
concern. Foreign Trade Policy (FTP) 2004-2009 envisages a doubling of India's
share in world exports from 0.75 per cent to 1.5 per cent by 2009. To achieve
this target, Indian Exports may need to exceed US$ 150 billion by 2009 as
world exports are also growing fast.

While high growth in global output and demand, especially in the major trading
partners of India, helped, it was the pickup in domestic economic activity,
especially the consistent near double-digit growth in manufacturing, that
constituted the main driver of the recent exports grew by 21 per cent and had a
share of around 74 per cent in total exports.
Further productivity gains in the exports sector require a deepening of domestic
reforms, and an accelerated removal of infrastructure
bottlenecks, including export infrastructure. Infrastructure remains the single
most important constraint to export growth. Achievement of the ambitious
export target set in Foreign Trade Policy (2004-2009) requires a projected
augmentation of the installed capacity of ports by 140 per cent. Indian ports,
which handle over 70 per cent of India's foreign trade even in value terms, have
a turnaround time of 3-5 days as against only 4-6 hours at international ports
like Singapore and Hong Kong. As for internal transport, while there has been a
perceptible improvement in the national highways, secondary roads need to be
improved and the issue of delays cause at inter-state checkpoints need to be
addressed. Exporters need to place more emphasis on non-price factors like
product quality, brand image, packaging, delivery and after-sales service. A
more aggressive push to FDI in export industries will not only increase the rate
of investment in the economy but also infuse new technologies and
management practices in these industries.
The strengthening of Indian exports has been aided by positive trends in global
demand, which was also reflected in world trade. After a sharp downturn in
2001, volume growth of world merchandise trade rebounded to 3.0 per cent in
2002 and further increased by 4.5 per cent in 2003. According to World Trade
Organization (WTO), real merchandise trade accelerated by nearly 10 per cent
in the first half of 2004, and is estimated to have grown in 2004 by 8.5 per cent,
or nearly twice as fast as in the preceding year.
Imports
1. 1950 to early 1970s - The value of imports as a proportion of GDP at market
prices, fluctuated through the 1950s (around 6 to 9.8 per cent) and thereafter
declined slowly till the early 1970s (from 6.8 per cent in 1960-61 to 4.2 per cent
in 1972-73, Table 23.1).
The severe foreign exchange crisis of 1956-57 led to the adoption of strict
measures for import controls. The import licensing system was intensified in the
late fifties and early sixties. After a brief attempt at using fiscal measures
instead of physical controls in mid-sixties, the import licensing was intensified.
Import policy became increasingly restrictive and complex. The quantitative
restrictions were used to provide protection to any domestic activity that
substituted for imports. The decline in public investment and industrial growth
after the mid-1960s also contributed to reducing the pressure on imports.
2. Early 1970s to late 1980s - After 1972-73, the value of imports as a
proportion of GDP showed a distinct increase. The import needs became
stronger as the industrial growth recovered in mid-seventies and showed an
accelerating trend in the 1980s. The eighties is marked with a clear shift in the
trade strategy towards reduction of quantitative restrictions on imports. The
number of items in the category of OGL-that is, a licence to import but with no
quantitative restrictions— increased substantially in this period. The rise in the
value of imports as a proportion of GDP at market prices is in spite of the sharp
increase in tariffs in eighties. The value of imports as a proportion of GDP
increased from a level of 4.6 per cent (1973-74) to over 6 per cent in the
remaining years of seventies. It was around 8 to 9 per cent in the decade of
eighties (Table 23.1).
2. 1990s - The value of imports as a proportion of GDP at market prices show a
distinct increase in the 1990s except for 1991-92. The decline in 1991-92 was
due to severe import curbs introduced after the payment crisis of 1990-91. The
value of imports as a proportion of GDP increased from 8.8 per cent in 1990-91
to 12.5 per cent in 1997-98 and 13 per cent in 2000-01 (Table 23.3).

Merchandise imports displayed strong growth in 2003-04, and rose faster than
exports. Lower tariffs, a cheaper US dollar and a buoyant domestic economy
boosted imports. Imports, in US dollar terms and on customs basis, increased by
27.3 per cent in 2003-04, on top of a rise of 19.4 per cent in the previous fiscal.

Growth in India's merchandise imports in 2004-05 at 40 per cent in dollar terms

was the highest since 1980-81. This surge in growth in 2004-05 was mainly due
to the steep rise in price of crude petroleum and other commodities with value
of POL imports increasing by 45.1 per cent. While volume growth in import of
POL was subdued at 6.4 per cent, largely in response to the price increase,
larger imports filled the gap between growing demand and stagnant domestic
crude oil production. In 2004-05, lower tariffs, a cheaper US dollar, a buoyant
manufacturing sector and high export growth boosted non-oil imports by 39 per
cent, particularly capital goods, intermediates, raw materials and imports needed
for exports. Buoyant growth of imports of capital goods at 21 per cent, on top of
the 40 per cent growth in 2003-04, reflected the higher domestic investment and
firming up of manufacturing growth. A significant contributor to the rise in non-
POL
imports was the 59.6 per cent growth of gold and silver on the back of a 59.9
per cent growth in 2003-04, due to the high international gold prices. The duty
reduction on imported gold from Rs.250 to Rs. 100 per 10 gram and
liberalisation of such imports as per trade facilitation measures announced in
January, 2004 could also have provided a fillip. Non-oil, non-bullion imports
increased by 31 per cent in 2004-05, compared to a rise of 28.5 per cent in
2003-04.
Unlike in 2003-04, the surge in POL imports in 2004-05 and 2005-06 (April-
November) was dominated by the price impact. International crude oil (Brent
variety, per barrel) prices, trending upwards since 2002, on average, rose from
US$ 27.6 in 2002-03 to US$ 28.9 in 2003-04, US$ 42.1 in 2004-05, and further
to US$ 56.64 per barrel in April-November 2005 with a peak of US$ 67.33 on
August 12, 2005. The stiffening of global crude oil prices was contributed by a
combination of heightened demand, limited spare capacity and geopolitical
threats to the existing capacity. The surge in crude oil prices has sharpened the
focus on the adverse impact of such volatility on domestic prices and the need
to minimise such impact. Given India's relatively high oil intensity and
increasing dependence on imported crude oil, efforts are being made to
diversify sourcing of such imports away from the geopolitically sensitive
regions. Another development has been the decision to build up strategic oil
reserves, equivalent of about 15 days requirement, to minimise the impact of
crude price volatility in the short term. In a related initiative, India is
coordinating with large oil importing countries in Asia, in exploring possibilities
for evolving an Asian products marker, in place of an Asian premium, which
would reduce the premium paid by Asian countries and thus, to some extent
help in controlling the country’s oil import bill.
Bulk of the increase was contributed by growth in non-oil imports, which
shot up from 17.0 per cent in 2002-03 to 31.5 per cent in 2003-04. The
acceleration of such imports was mainly due to higher imports of capital goods,
industrial raw materials and intermediate goods. It reflected the higher domestic
demand and firming up of industrial growth.
Factors for Imports Growth
Imports continued to rise at a rate faster than that of exports in the current
financial year, rising by 34.7 per cent in April-January, 2004-05 on back of good
industrial performance and rising international crude oil prices. The rise has
been contributed by a continuing robust growth in non-POL imports of 32.7 per
cent and acceleration in POL
imports by 40.1 per cent. The higher non-POL non-bullion imports are
indicative of the economy's growing absorptive capacity for imports. These
along with rising trends in domestic production of capital goods and strong
growth in non-food credit indicate a quickening pace of investment activity
during the current fiscal.
India moved one notch up the rankings in both exports and imports in 2004 to
become the 30th leading merchandise exporter and 23rd leading merchandise
importer of the world.
Changing Structure of India's Foreign Trade
In order to study the structure of India's foreign trade we have to analyse the
changing pattern of imports and exports.
Since the purpose of the import control regime was to confine imports to
essential consumer goods, raw materials, and investment goods needed for
domestic production and exports, it is not surprising that changes in the
commodity composition of India's imports reflected this. For example,
foodgrains and edible oils accounted for about 16 per cent of total imports in
1960-61, and about 1 per cent in 1990-91. Imports of gems, which were
negligible in 1960-61, accounted for US $ 2.079 million or nearly 8 per cent of
imports in 1990-91, reflected the fact that gems and jewellery exports at $1.667
million comprised nearly a sixth of total exports. The share of crude petroleum,
oils, and lubricants in total imports rose from about 6 per cent in 1960-61 to a
high of roughly 40 per cent in 1980-81. However, it fell to about 23 per cent
partly on account of fall of crude petroleum prices and partly also to rapid
growth of domestic crude output from the Bombay High Field.
Turning to exports, India's share of world exports has fallen steadily from about
2 per cent in 1950 to less than 0.5 per cent in 1990. Since world export grew
rapidly between 1950 and 1973 and somewhat more slowly thereafter, India's
exports grew in absolute terms in spite of a declining share. But the dramatic
fall in share reflects the fact that other countries were able to take greater
advantage of growing world trade.
The composition of India's exports has, as expected, shifted moderately away
from primary products to manufactured goods, whose share rose from about 45
per cent in 1950-51 to 79 per cent in 1990-91. However, primary exports have
been virtually stagnant, and manufactured products have accounted for almost
the entire growth in total exports (Table 23.7). Among manufactured products,
just four items leather, gems, garments, and textiles-accounted for most of the
growth in recent years. In contrast, the export of engineering goods, which rose
by over 20 per cent per year in value terms between 1950-51 and 1975-76 and
between 1970-71 and 1978-79, declined between 1980-81 and 1985-86.
The export of gems has grown rapidly since the early 1970s. This export is
heavily dependent, however, on the import of uncut small gems, the cost of
which is determined in large part by the South African monopoly De Beers. The
exports of garments and textiles are governed by India's quotas under the Multi-
Fibre Arrangement (MFA). Bhalla (1989) points out that until the 1980s, India
did not fully use quotas, and India's competitors did better in quota, as well as,
non-quota countries. It is possible that the spurt in India's garment and textile
exports reflects better use of quotas and higher prices realised on the average.
Whether India will be able to compete in the textile and apparel market in the
absence of the MFA is debatable, particularly in view of the fact that the Indian
textile industry has fallen behind technologically in the past four decades
primarily because of the government's textile policy.
During the high-growth phase of India's exports, that is, between 1993-94 and
1995-96, major export items which had contributed significantly to the growth
process included engineering goods, cotton yarn, fabrics, chemicals and allied
products, rice, coffee, processed fruits, juices and miscellaneous processed
items and marine products. The growth rates of export of all these items have
dropped considerably during 1996-1998. Among the manufactured exports, the
deceleration of growth rate has been most marked for engineering goods. Within
the agricultural and allied products group, export levels of both rice and coffee
declined between 1995-96 and 1997-98.3
Comparison between 90s and 80s
For the purpose of analysis at the aggregate level, India's trade performance
during 1992-93 to 1998-99 (referred to here as the nineties) has been compared
with that during 1980-81 to 1990-91 (the eighties). The year 1991-92 witnessed
considerable strain on the balance-of-payments. To meet the crisis, severe
restrictions were placed on imports and the Rupee was adjusted downward in
July 1991. Being an exceptional year, 1991-92 should be excluded in any time
series based analysis of trade developments. The periodisation of the analysis
captures the structural shifts in the growth of exports and imports during
the sub-periods. For instance, on an average annual basis, export growth during
1992-93 to 1998-99 at 9.8 per cent was higher than that of 8.2 per cent
registered during 1980-81 to 1990-91. Similarly, the average import growth
observed during the nineties at 12.0 per cent remained substantially higher than
that of 7.8 per cent recorded during the eighties (1980-81 to 1990-91).
The world trade has undergone significant changes since 1996 due to a host of
developments including a sharp fall in international prices for manufactured
products and the emergence of economic crises in certain parts of the world. In
addition, protectionist policies and practices adopted by various industrialised
countries during the recent years and perhaps most importantly anti-dumping
and countervailing measures seriously affected the export efforts of the
developing countries (Stiglitz, 1999). These unfavourable factors have had their
impact on the developing countries including India's trade performance.
In the light of the above factors, it would be appropriate to examine the trade
performance of India during the two sub-periods of the nineties; the first sub-
period covering the first four years following the introduction of reforms (i.e.,
1992-93 to 1995-96) and the second sub-period consisting of the subsequent
three years (i.e., 1996-97 to 1998-99). During the first sub-period, on an average
basis, India's exports and imports increased by 15.7 and 17.5 per cent,
respectively, which were significantly higher than the growth rates during the
eighties. Broadly in line with the unfavourable external developments, between
1996-97 and 1998-99, growth in India's exports and imports, on an average
basis, decelerated to 2.0 per cent and 4.5 per cent, respectively. India's share in
world exports, which had declined from 0.52 per cent to 0.47 per cent between
1984 and 1987, improved to 0.53 per cent in1992. Not with standing the
slowdown in India's export growth since 1996, reflecting the relatively better
performance by India vis-à-vis rest-of-the-world, its share in global exports
reached 0.62 per cent during 1997 (IMF, 1998).

Trade GDP Ratio

India's trade-GDP ratio showed substantial improvements during the nineties as
compared with the eighties. The export-GDP ratio declined from 4.9 per cent in
1980-81 to 4.2 per cent in 1985-86 and thereafter it gradually improved and
reached 6.1 per cent in 1990-91. During the nineties, the ratio reached its
highest level at 8.7 per cent in 1995-96. The ratio declined, marginally, during
the next three years and was at

8.1 per cent in 1998-99. On an average basis, export-GDP ratio increased from
5.0 per cent to 8.2 per cent between the eighties and the nineties. Between these
two periods, on an average basis, India's import-GDP ratio increased from 7.7
per cent to 9.4 per cent. The noticeable improvements in the export-GDP and
import-GDP ratios point to the increasing openness of India's foreign trade
regime to global trade

Trade Deficit-GDP Ratio

Along with the increase in trade-GDP ratio, there has been a decline in India's
trade deficit-GDP ratio between the two periods. This is borne out by the fact
that the difference between export and import-GDP ratio on an average basis,
declined from 2.7 per cent in the eighties to 1.2 per cent in the nineties. This
indicates that the divergence between export and import performance was more
pronounced during the eighties than in the nineties. Similarly, the export-import
ratio (on an average basis) increased substantially from 65.1 per cent during the
eighties to 87.0 per cent during the nineties reflecting thereby the increasing
alignment between India's export and import performance during the nineties as
compared with the eighties.
Structural Change in Exports
Changes in Terms of Broad Categories
Reflecting the development of a large and diversified industrial sector, during
the post-Independence period, India has gradually transformed from a
predominantly primary product exporting country into an exporter of
manufactured products. In the mid-eighties, manufactured exports accounted for
about two-thirds of India's total exports while the rest comprised of primary
products. During the years preceding the introduction of economic reforms, i.e.,
between 1987-88 and 1991-92, while the share of manufactured goods
increased from 67.8 per cent to 73.8 per cent, that of primary products declined
from 26.1 per cent to 23.1 per cent. These trends were reinforced during the
subsequent period (i.e., 1992-93 to 1998-99). On an average basis, the share of
manufactured products increased by 4 percentage points while that of primary
commodities declined by 2 percentage points between the eighties and the
nineties. The share of residual exports including petroleum products declined
almost continuously between 1987-88 and 1998-99.
An analysis of the commodity composition of India's exports shows that the
combined share of the top six export categories, namely, gems and jewellery,
readymade garments, engineering goods, textile yarn, fabrics, made-ups, etc.,
leather and manufactures and chemicals and allied products increased steadily
rom 59.4 per cent in 1987-88 to 65.7 per cent in 1991-92. On an average basis,
the combined share of these exports at 66.8 per cent during the period 1992-93
to 1998-99 was 3 percentage points higher than that during the eighties.
The increase in the share of the top six categories of exports in the total exports
by 9 per cent between 1987-88 and 1998-99 reflects a rise in the concentration
of India's exports in terms of broad export categories. It may, however, be
mentioned that each of these top export categories consists of a large number of
individual items. Even if the export shares of traditional items within a broad
category decline, the share of the whole product category in total exports can
increase due to appearance of newer products within that group. The emergence
of newer export items, however, indicate export diversification and in order to
get a clear picture about the change in the concentration of exports, it is
essential to examine the issue at a more disaggregated level.
Commodity Composition: Exports
The changes in the structure of India's exports is more noticeable at the
disaggregated level. Items that registered considerable improvements in relative
export performance between the eighties and the nineties include coffee,
processed fruits, juices and miscellaneous processed items, rice, spices, works
of art excluding floor coverings and other items like sugar and mollases and raw
cotton (not elsewhere included). On an average basis, the total export earning
from these six items taken together declined by 2.9 per cent in the eighties,
while they registered an impressive 20.5 per cent growth rate in the nineties.
Items, which have exhibited steady relative export performance through the two
periods include drugs, pharmaceuticals and fine chemicals, other agricultural
and allied items, cotton yarn, fabrics, made-ups, etc. On an average basis, the
total export earning from these three items taken together increased by 16.1 per
cent and 12.8 per cent during the eighties and the nineties, respectively. The
relative export performance of items such as oil meal, hand-made carpets
excluding silk carpets, other ores and minerals and rubber, glass, paints,
enamels and products worsened considerably during the nineties as compared to
the eighties. As against an average growth of 18.1 per cent during the first
period, the average growth rate of export earnings by these four items taken
together decelerated sharply to 6.5 per cent during the nineties. Items which
registered relatively low growth rates during the both periods include cashew,
gems and jewellery, iron ore, leather and manufactures, natural silk yarn,
fabrics, made-ups, etc., petroleum products and tea. The combined export
earnings of these seven items taken together, on an average basis, increased by
6.3 per cent and 6.7 per cent, during the pre-1992 and post-1992 periods,
respectively.
The change in the relative performance of individual export items between the
two periods indicates that the change in the structure of agriculture and allied
exports has been more marked than manufactured exports. Items such as coffee,
rice, processed fruits, juices and miscellaneous processed items remained
relatively less important export items during the eighties. These items, however,
can be identified as crucial emerging exports during the nineties. In terms of
average growth rate, these exports had declined by 3.2 per cent in the eighties,
while they increased by an impressive 29.7 per cent in the nineties. The
combined share of these three exports in India's total agricultural and allied
exports had declined from 23.3 per cent in 1987-88 to 15.4 per cent in 1990-91.
Their share more than doubled to reach 34.2 per cent in 1998-99. Alongside the
emergence of newer products, the relative importance of some of India's
traditional agricultural and allied export items such as cashew, oil meal, tea and
tobacco declined considerably as between the two periods. On an average, the
growth rate of these exports decelerated from 7.9 per cent in the eighties to 4.2
per cent in the nineties. More importantly, their combined share in total
agricultural and allied exports, which increased from 38.1 per cent in 1987-88 to
43.6 per cent in 1989-90, declined sharply to 26.2 per cent in 1998-99.
Move Towards Value-addition
There are indications that during the nineties, some of the Indian exports have
moved upwards in the value-addition chain whereby instead of exporting raw
materials, the country has switched over to the export of processed items. For
example, while the value of iron ore exports declined, that of primary and semi-
finished iron and steel increased many fold between the two periods. Reflecting
this trend, the share of ores and minerals in total exports declined, on an average
basis, from 5.5 per cent to 3.5 per cent between the eighties and the nineties.
There were also significant compositional shifts within the major manufactured
product groups such as engineering goods, chemicals and allied products, etc. as
between the two periods. On an average basis, the share of basic chemicals,
pharmaceuticals and cosmetics within the chemicals and allied group, declined
from 71.4 per cent to 62.4 per cent between the eighties and the nineties. In
particular, the average export share of cosmetics, toiletries, etc. within this
group declined sharply from 12.4 per cent to 4.7 per cent between these two
periods. Within the same group, the average export share of plastic and linoleum
increased from 6.4 per cent during the eighties to 13.2 per cent in the nineties.
Among the components of engineering goods, the average share of machinery
and equipment in total engineering exports declined from 30.6 per cent to 21.7
per cent while that of primary and semi-finished iron and steel increased from
2.9 per cent to 11.9 per cent as between the two periods. Among the textile
products, while the importance of man-made yarn, fabrics, made-ups increased
as between two periods, that of jute manufactures declined sharply. The internal
export composition of leather and leather manufactures and readymade
garments remained stable before and after the initiation of economic reforms.
Moving Away from Traditional Exports Towards
New Manufactured Products
India's manufacturing exports are showing tendencies of shifting away from
traditional exports towards relatively new manufactured products. Another
interesting point about the compositional change in the manufactured exports is
that, by and large, major export items within the category for which internal
composition remained unchanged between the eighties and the nineties (e.g.,
leather and leather products, ready-made garments) recorded relatively poor
export performance as compared with groups which recorded changes in their
internal composition (e.g., chemicals and allied products, engineering goods).
This indicates the existence of a close link between export performance and
structural change in the case of India's manufactured exports.
As mentioned earlier, since 1996-97 there has been a marked. deceleration in
the growth of India's manufactured exports. Apart from its negative impact on
the overall export growth, a fall in the growth of manufactured exports also
likely to have constrained structural transformation within the category of
manufactured exports. A number of external as well as domestic factors
contributed to the process of slowdown in India's exports in general and
manufactured exports in particular. These included: decline in international
manufactured prices, increased protectionism by the industrialised countries
coupled with non-implementation of the transitional agreements on integration
of trade in textiles and clothing with the WTO by the industrialised countries.
While these factors had adverse implications for Indian manufacturing exports,
particularly exports of engineering goods, chemicals and allied products and
textiles and clothing, the sharp price fluctuation in the international market for
raw diamonds and gold between 1996 and 1998, had contributed to the decline
in gems and jewellery exports, the single largest export item of India.
India's Share in Global Exports:
Compositional Change
The foregoing discussion focuses solely on the internal change in the
commodity composition of India's exports. It is also important to study whether
there has been any change in India's share in global trade. It may be noted that
commodities for which India's share in global exports have increased
considerably as between the two periods include rice, coffee and substitutes,
feeding stuff for animals, textile yarn (in particular, cotton yarn), pearls,
precious and semi-precious stones and gold and silver jewellery. Items for
which India's global export share declined as between the two periods include
shellfish, tea and mate, spices, iron ore concentrate, leather, leather
manufactures and certain categories of textile and garment articles.
It is interesting to note that during the eighties, there were many export items
for which India's global market shares were high while growth in world trade
for those products was low. It is argued that lack of alignment between the
composition of India's export basket and the demand structure in foreign
markets has been a major constraint for expansion of India's exports. Reversing
such trends, during the nineties, by and large, India's global shares have
improved for those commodities for which world trade showed relatively high
growth potential and India's global shares declined for those commodities for
which growth in world trade decelerated. In other words, the alignment between
the structure of world demand and the composition of India's exports has
improved during the nineties as compared to the eighties. This is likely to have
major impact on the future behaviour of India's exports.
India's export share in world trade has increased perceptibly during the recent
period. India's exports as a percentage of world exports improved to 0.56 per
cent during 1991-1996 and further to 0.65 per cent during 1996-2002 from 0.48
per cent in the 1980s. The ratio was 0.71 per cent in 2000-01, the highest
achieved so far since the 1970s. Nonetheless, India's share in world exports is
still very low and appears unimpressive when compared with the other major
trading Asian countries, such as, China and other East Asian economies like
Malaysia, Thailand, Singapore, Korea and Indonesia (Table 23.9). China
demonstrated the most dramatic change as its share in world exports. more than
doubled in a decade from 2.0 per cent in 1991 to 4.4 per cent in 2001. Group-
wise, India's share in the imports of industrialised countries in the 1990s
declined as compared to that in 1986. In respect of the developing countries as a
group, however, it has increased from 0.5 per cent in 1986 to 1.1 per cent during
1996-2000.
The Ministry of Commerce and Industry, Government of India has set an
export target of 1 per cent share of world exports by 2006-07 for the medium-
term which would be co-terminus with the Tenth Five Year Plan. This target is
based on historical trends, current prospects and the requirement of a compound
annual growth rate of about 12 per cent for exports till the year 2006-07
(Government of India, 2002a). The export performance is known to depend on
price competitiveness, as well as non-price factors. As regards the price
competitiveness, a number of earlier studies have emphasised that real exchange
rate may be an important variable influencing the price competitiveness of
India's exports. In India, large exchange rate misalignment has not occured in
the last one decade as the market itself has corrected the misalignment gradually
over different episodes.
India's export performance is affected by domestic as well as external
impediments. The domestic factors inhibiting India's export growth are
infrastructure constraints, high transactions cost, small-scale industry
reservations, inflexibilities in labour laws, lack of quality consciousness and
constraints in attracting FDI in the export sector. High levels of protection in
relation to other countries also explain why FDI in India has been much more
oriented to the protected domestic market, rather than as a base for exports. The
exports of developing countries like India are facing increasing difficulties by
emerging protectionist sentiments in some sectors in the form of technical
standards, environmental and social concerns besides non-trade barriers like
anti-dumping duties, countervailing duties, safeguard measures and sanitary and
phyto-sanitary measures. Indian products which have been affected by such
barriers include floriculture products, textiles, pharmaceuticals, marine products
and basmati rice exports to the European Union and mushroom and steel
exports to USA and also grapes, egg products, gherkins, honey, meat products,
milk products, tea, and spices. Differential tariffs against developing countries
have also adversely affected market access into these countries (Government of
India, 2002b; WTO, 2002). According to the WTO, exports from India are
currently subject to 40 anti-dumping and 13 countervailing measures mainly for
agricultural products, textiles and clothing products
and chemicals and related products. This brings into focus the importance of
non-price factors like quality, packaging and the like mentioned earlier, where
India still seems to be lacking as compared to the international standards. This
has adversely affected India's export performance vis-à-vis other developing
countries which may have an improved standing in these non-price factors.
Commodity Composition of Imports
In the discussion on the structural change in India's imports in this sub-section,
the relative shares of the major commodities/groups in total imports should
generally be exclusive of gold and silver imports. This has been done keeping in
view the sharp increase in gold and silver imports in the recent years, which
obscures the changes in the relative shares of other items. The import of gold
and silver rose from US $ 4 million in 1990-91 to US $ 4,876 million in 1998-
99 and formed as much as 11.6 per cent of India's total imports during that year.
The relative share of capital goods in India's total imports net of gold and silver
improved, marginally, from 25.6 per cent during 1987-91 to 26.0 per cent
during 1992-1999. Within the capital goods group, the rise in import was more
pronounced in the case of manufacture of metals, machine tools, and electrical
machinery (including electronic and computer goods), while that of non-
electrical machinery and transport equipment recorded a relatively low order of
increase. While the overall increase in the import of industrial raw materials and
intermediate goods was less pronounced, certain individual items mainly
catering to export activities such as cashew nuts, textile yarn, fabrics, made-ups
etc., and chemicals (organic and inorganic), however, recorded sharper rise.
Among other items, the imports of petroleum (crude and products) showed
wide fluctuations, reflecting inter alia, the movements in international prices.
There was a sharp increase in its import during 1989-90 (25.2 per cent) and
1990-91 (60.0 per cent) and the average annual growth rate during 1988-1991
was considerably higher at 27.2 per cent as compared with the 12.0 per cent
growth in total imports. After attaining a high base in 1990-91, the oil imports
declined during 1991-92 by 11.7 per cent. During the period 1992-93 to 1998-
99, the growth rate in oil imports ranged between 33.4 per cent in 1996-97 and a
negative of 21.2 per cent in 1998-99. Although the average annual growth rate
of this item during 1992-1999 was low (4.6 per cent), the average value at US $
7,134 million stood 79.2 per cent higher than
US $ 3,981 million during 1987-1991. Consequently, the relative share of oil
imports moved up to 22.5 per cent during 1992-1999 from 19.4 per cent during
1987-1991.
Similarly, the average level of import of manufactured fertilisers during 1992-
1999 also stood 77.7 per cent higher than that during 1987-1991, although the
average annual growth rate remained considerably lower at 9.5 per cent during
1992-1999 than that of 79.5 per cent during 1988-1991. The increase in the
imports of consumption goods was relatively less pronounced (27.3 per cent),
with its share dropping from 4.3 per cent during 1987-1991 to 3.6 per cent
during 1992-1999. Within this category, the import of edible oils, however,
increased by 55.9 per cent and that of sugar increased by 269.3 per cent.
 The changes in the structure of India's imports are reflective of the influence of
three factors:
(1) movements in international prices;
(2) changes in trade policy; and
(3) pattern of domestic demand.
The role of international prices in shaping the trends in the import of petroleum,
crude and products has already been discussed earlier. This apart, it may be
indicated that the international prices of manufactured goods have declined
considerably during the recent years, keeping their import value depressed.
The surge in the imports of gold and silver, edible oils and manufactured
fertilisers were to some extent policy driven. Similarly, reflecting the impact of
further easing of the restrictions on the import of capital goods, these items
recorded higher import growth during 1992-1999. Since a sizable part of India's
imports cater to the needs of the industrial sector, the trends in the demand for
imports may be judged from the overall growth in industrial production.
Direction of Foreign Trade
Prior to Independence, a large part of India's trade was either directly with
Great Britain or its colonies or allies. This pattern continued for some years
after Independence as well since India had not till then explored the possibilities
of developing trade relations with other countries of the world. For example, the
combined share of UK and USA in India's export earnings was 42 per cent in
1950-51. Their share in India's import expenditure was as much as 39.1 per cent
in the same year. With other capitalist countries like France, Germany, Italy,
Japan, etc. India either did not have trade relations at all or they were very
insignificant. As political and diplomatic contacts developed with other
countries, economic relations also made a headway. Thus new vistas for
developing trade relations with other countries opened up. The situation has
changed very much since, and now after four and a half decades of planning, the
trading relations exhibit marked changes. The diversification in trade relations
has reduced the vulnerability of the economy to outside political pressures.
In the year 1950-51, the share of UK in India's imports was 20.8 per cent and
that of USA was 18.3 per cent. Thus, the combined share of these two countries
was 39.1 per cent. This reflected the colonial heritage of the country. Within a
decade, the picture started showing some changes. New trading partners like
West Germany, Canada and USSR emerged. There was a change in the relative
position of UK and USA as well, with the latter pushing down the former to the
second place. Excepting a year or two, USA has continuously maintained the
first position thereafter. During the planning period as a whole, India has
obtained maximum imports from USA, the reason being that India has imported
large scale quantities of capital goods, intermediate products and foodgrains
(under P.L.480 agreement) from that country. With the expansion of trading
relations with Japan, West Germany and USSR, the dependence on the UK
declined considerably. Thus the share of UK in Indian imports declined from
19.4 per cent in 1960-61 to 5.7 per cent in 1997-98. On the other hand, the share
of Japan increased from 1.5 per cent in 1950-51 to 5.4 per cent in 1960-61 and
further to 7.5 per cent in 1990-91. However, thereafter, it decreased in
percentage terms to 6.5 per cent in 1995-96 and 5.2 per cent in 1997-98.
Another significant development was the expansion in trading relations with
the socialist countries especially the erstwhile USSR. Imports from USSR were
negligible in 1950-51. In 1960-61 they amounted to a meagre Rs. 16 crore.
However, thereafter, they increased rapidly increasing the share of USSR in
India's imports from 1.4 per cent in 1960-61 to 6.5 per cent in 1970-71. For a
number of years it occupied the second place after USA. For instance, during
1980-81 To 1983-84, USA occupied the first place in India's imports and USSR
was second. In 1984-85, the share of USSR was 10.4 per cent and it displaced
USA from the first place. The picture changed thereafter. In 1985-86, USA was
first, Japan second and USSR third. In 1990-91, with a share of 12.1 per cent,
USA occupied the first place. It was followed by Germany with a share of 8.0
per cent (the figure is for unified Germany). Japan had the third position (share
7.5 per cent). UK and Saudi Arabia shared the fourth position with a share of
6.7 per cent each, Belgium had the fifth position (share 6.3 per cent) while
USSR had the sixth position (share 5.9 per cent). With the disintegration of
USSR the direction of imports has now changed markedly. For instance, in
1997-98, USA occupied the first position in India's imports (share 8.9 per cent),
followed by Saudi Arabia (share 6.2 per cent), Germany (share 6.1 per cent),
Belgium (share 6.0 per cent), Kuwait and UK (share 5.7 per cent each) in that
order.
Direction of Exports
As is clear from Table 23.10, OECD group accounts for a major portion of
India's exports. The share of this group in 1960-61 was 66.1 per cent and in
1997-98 was 55.7 per cent. Almost 46 per cent of these exports were accounted
for by the EU countries in 1997-98. The OPEC group accounted for 4.1 per cent
of exports in 1960-61 and its share in 1997-98 rose to 10.0 per cent. Most
significant was the rapid increase in exports to the countries of Eastern Europe
particularly USSR For instance, Eastern Europe accounted for 7.0 per cent of
export earnings in 1960-61 and its share shot up to 22.1 per cent in 1980-81.
During recent years, exports to this group have suffered a setback due to marked
political upheavals in these countries and the disintegration of the USSR. In
1997-98 the share of Eastern Europe in total exports had slumped to a mere 3.1
per cent. Developing nations of Africa, Asia and Latin America accounted for
more than one-fourth of India's export earnings in 1997-98. Most important in
this group have been the countries of Asia. In fact, exports to Asian countries
accounted for 21.3 per cent of India's total export earnings in 1997-98. Thus,
countries of Asia now account for more than one-fourth of India's export
earnings.
Direction of exports in 1999-2000 show significant increases in India's exports
to its major destinations like OECD, Asia and OPEC regions. Exports in US
Dollar value, grew by 12.8 per cent to OECD, 20.1 per cent to Asia (other than
OPEC countries) and 12.3 per cent to OPEC in 1999-2000 as compared with
declines of 1.5 per cent, 14.4 per cent and low growth of 0.8 per cent
respectively in 1998-99. Other regions recording robust growth in exports
included Eastern Europe (due mainly to turnaround in exports to Russia) and
Latin America and Caribbean region with Mexico, Peru, Chile, Barbados and
Panama accounting for major increases. Exports to developing countries in
Africa, however, declined by 5.4 per cent in 1999-00 as against a rise of 9.9 per
cent in the previous year. In terms of region-wise share in total exports, while
the share of OECD, OPEC and developing countries from Africa declined in
1999-2000, those of Eastern Europe and Asian developing countries from Africa
declined in 1999-2000, those of Eastern Europe and Asian developing countries
increased during this period. The share of developing countries from the Latin
America and Carribean region was, however, maintained at 1.7 per cent.
Although the share in total exports to OECD countries, as a group, registered a
marginal decline from 57.8 per cent in 1998-99 to 57.6 per cent in 1999-2000,
exports to many developed countries like Canada (25.8 per cent), UK (21.1 per
cent), USA (18.5 per cent), Netherlands (16.1 per cent), France (10.9 per cent)
and Belgium (7.2 per cent), in this region recorded significant increases during
the year. The share rise in share of exports to developing countries of Asia was
largely on account of the recovery from the crisis by East Asian countries as a
result of which the share of our exports to selected East Asian countries
rebounded from 11.6 per cent in 1998-99 to 13.7 per cent in 1999-2000.
Direction of Imports
Sources of imports reveal a sharp decline in share of imports in total imports
from OECD countries from 51.6 per cent in 1998-99 to 44.8 per cent in 1999-
2000 as imports from these countries declined by 3.2 per cent in 1999-2000.
Bulk of this decline in share was appropriated by imports from the OPEC region
whose share rose to 23.8 per cent in 1999-00 (as compared to 18.3 per cent in
1998-99) mainly because of increase in international petroleum crude oil prices.
Similarly, the share of imports sourced from non-OPEC developing countries
(of Africa, Asia and Latin America and Carribbean) improved from 21.1 per
cent in 1998-99 to 22.6 per cent in 1999-2000. The share of imports from
Eastern Europe was broadly maintained in 1999-2000 due mainly to recovery in
imports from Russia. Imports from developing countries of Africa and Latin
America and Carribbean regions grew by 21.9 per cent and 20.3 per cent
respectively in 1999-2000 and was contributed among others, by countries like
Egypt, Ghana, Brazil, Chile and South Africa. Imports from developing
countries from Asia also recorded a high increase of 18.5 per cent with robust
growth from countries like China, Hong Kong, Malaysia and Thailand. The
share of selected East Asian countries in total imports increased from 14.9 per
cent in 1998-99 To 15.5 per cent in 1999-2000 due partly to the share
depreciation of currencies of these countries during the Asian crisis.
A sharp increase in imports from other residual destinations, coupled with
decline in share of OPEC region, may suggest a change in sourcing of oil
imports away from the OPEC region during the current financial year.
Structural changes are also discernible from the data on sources of India's
imports. While there has been a sharp increase in the relative share of the
developing countries, that of the industrialised countries declined. Between
1987-1991 and 1992-1999, the relative share of the developing countries as a
group moved up from 18.0 per cent to 23.0 per cent. This was largely on
account of the increase in the imports from the newly industrialised countries in
South East Asia. Among the commodities that contributed to the import growth,
petroleum (crude and products) from Malaysia and Singapore, vegetable oils
from Malaysia, chemicals from Republic of Korea and Singapore, and
electronic goods from Hong Kong, Republic of Korea, Malaysia and Thailand
were prominent. Between the two periods, the relative shares of the countries
belonging to the OPEC group also increased from 14.5 per cent to 21.9 per cent.
This is mainly reflective of the surge in the oil import bill on account of higher
prices.
The share of the OECD as a group in India's imports dropped considerably from
59.4 per cent during 1987-1991 to 52.1 per cent during 1992-1999. Within this
group, the relative share of the EU countries fell from 31.8 per cent during
1987-1991 to 26.9 per cent during 1992-1999. The import shares of some of the
individual EU countries such as Denmark, Greece, Ireland and Italy, however,
recorded relatively high growth, while those from traditionally important
countries such as Germany, Netherlands, Sweden and UK showed lower rise.
The relative share of the UK fell to 5.8 per cent during 1992-1999 from 7.9 per
cent during 1987-1991. Among other OECD countries, the imports from
Australia, New Zealand and Switzerland recorded relatively large growth. The
relative share of Switzerland moved up from 1.1 per cent during 1987-1991 to
4.0 per cent during 1992-1999. This was largely on account of the import of
gold and silver and non-electrical machinery. It may be indicated that during
1992-1999, the import of gold and silver formed as much as 69.2 per cent of
India's total import from Switzerland, while Switzerland along accounted for
58.1 per cent of India's total import of gold and silver during this period. The
relative share of the East European countries declined from 8.1 per cent during
1987-1991 to just 2.9 per cent during 1992-1999 with absolute decline in the
imports from most of the countries belonging to this group.
Summing Up
Notwithstanding the earlier policy initiatives aimed at liberalisation of India's
foreign trade, the outward-looking trade policy measures announced in 1991
marks the initiation of a new era in India's foreign trade. India's foreign trade
performance improved significantly during the recent years and there has been a
perceptible change in the structure of India's foreign trade between the eighties
and the nineties.
The share of manufactured products has increased in India's total exports. At the
same time, since the introduction of reforms, the proportions of high-value and
differentiated products have increased in India's export basket.
Along with the increase in India's aggregate share in world trade, the alignment
between the country's export basket and world demand has increased during the
nineties.
The relative share of certain capital goods in India's total imports has also
increased in this period. Imports of manufactured fertilizers and edible oils also
recorded higher growth during the post-1991 period.
In line with the policy changes, imports of gold and silver have increased
sharply during the nineties.
Reflecting the increased link between exports and imports, the shares of certain
export-related imports have also increased during the recent years.
The most remarkable change in the country-wise composition of India's exports
and imports since 1991 has been the increase in the share of developing
countries in India's overall trade.

While the share of the East European countries has declined in India's total
trade, that of the OECD countries has declined in the case of imports.
India's foreign trade has, however, been adversely affected by certain
unfavourable external developments since 1996.
Notwithstanding these negative developments, India's trade performance during
the nineties as a whole has been better than that during the eighties.
 BALANCE OF TRADE
Balance of Trade, simply defined is, the difference between the value of export
of goods and the value of import of goods or more generally between exports
and imports or (XM) where X denotes value. of exports and M. value of
imports..
When value of exports is more than value of imports (i.e., X > M) balance of
trade (BoT) is said to be favourable or positive. On the other hand when exports
are less than imports (XM) or imports more than exports (M > X), the balance
of trade (BoT) is said to be unfavourable, or negative or there is said to be a
deficit in the balance of trade.
Since goods are also called merchandise, the balance of trade or trade balance is
also called balance of merchandise account.
India's Balance of Trade
Ever since the beginning of planning era in 1951, India has continued to suffer
from an unfavourable balance of trade. The only exceptions to this trend have
been the years 1972-73 and 1976-77 when the country had a positive trade
balance of Rs. 104 crore and Rs. 68 crore, respectively.
In the early years after Independence, the value of India's exports as well as
imports were low and the difference between them was 70 small. This resulted
in comparatively lower magnitude of deficit in trade balance. From Rs. 163
crore average annual deficit it rose to an annual average of Rs. 36,363 crore
during 1997 and 2002. The early years of Tenth Plan; it was Rs. 42,069 crore in
2002-03 which increased to Rs. 62,870 crore in 2003-04. Thus, the trade deficit
has not only persisted since 1951 but has increased widely over the years to
reach alarming levels by the end of the century as is shown in Table 23.11.
Causes of Unfavourable Balance of Trade
Continued excess of imports over exports has perpetuated the unfavourable
balance of trade since 1950-51. To begin with, the trade deficit was small, but it
widened over time, more particularly from the Sixth Plan onwards, it rose
sharply to assume serious dimensions during and after the Eighth Five-Year
Plan. This has happened because exports from India have not been able to keep
pace with the high growth rate of imports.

Large Increase in Imports

In terms of value, India's imports have increased sharply between 1950-51 and
2005-06 from a level of Rs. 608 crore to estimated Rs. 4,90,532 crore in 2004-
05. Some of the factors that have contributed to this massive import growth are
as below:
(i) Large Increase in Developmental Imports: Under planned economic
development of the country starting with the First Plan, there has been a
continuous expansion in imports of capital goods, machinery equipment, etc.
The value of capital goods imports (including transport equipment) increased
from Rs. 366 crore in 1960-61 to Rs. 1,910 crore in 1980-81, Rs. 10,486 crore
in 1990-91 and Rs. 63,175 crore in 2004-2005. Similarly there was increase in
raw materials and maintenance imports such as equipment needed to replace the
worn-out machinery and maintain it in working order.

(ii) Large Increase in Import of Petroleum: Petroleum, oils and lubricants

(POL) have registered more than 500-fold increase between. 1960-61 and 1991
as the value of POL imports increased froin Rs. 69 crore to Rs. 10,816 crore,
which further rose to Rs. 1,34,094 crore in 2004-05. Petroleum is a major
source of energy used in industry and in surface as well as air transport. It is
also used for domestic fuel in the form of kerosene and cooking gas. Personal
transportation modes comprising motor cars and scooters, motorcycles, etc.,
depend on petroleum. Petroleum is also used in industry as raw material for
many synthetic products. Therefore, a massive increase in demand for and
import of POL is thus inevitable.
(iii) Fertiliser Imports: In spite of increased domestic production, fertilisers are
imported to meet their fast growing consumption requirements. Thus, between
1960-61 and 2000-01, import of fertilisers has gone up from Rs. 13 crore to Rs.
3,034 crore in 2000-01 and Rs. 5,143 crore in 2004-05.
(iv) Import of Pearls and Precious Stones: The unfinished and
finished/worked precious and semi-precious stones has increased from Rs. 1
crore in 1960-61 to Rs. 42,336 crore in 2004-05.
Modest Growth in Exports
Growth of exports was quite low and insignificant till the Third Five-Year Plan.
The total value of exports increased from Rs. 642 crore in 1960-61 to Rs.
32,553 in 1991, Rs. 2,03,571 in 2000-01 and Rs. 3,61,879 in 2004-05. Both
external and internal factors are responsible for this modest growth.
External Factors
(i) Low World Demand: The world demand for many goods has remained low
due to continuing recession and economic downturn in many countries.
(ii) Low Income and Price Elasticity of Goods Exported: Many of the goods
exported by India are primary products such as cereal preparations, fish and
marine products, etc. The demand for these goods is generally less elastic, i.e.,
the demand does not change much with change in income or prices. Thus, when
we make efforts to sell more and increase supply, prices fall but demand does
not increase much. Hence, we end up earning lower value even for larger
quantity sold and our export earnings either do not increase much or sometimes
may even decline.
(iii) Import Restriction on Our Goods Entering Foreign Countries: Many
countries have imposed restrictions on goods imported by them and this
adversely affects our exports. These restrictions may be in the form of quotas,
(not more than a certain given quantity of a given product is to be imported
from outside), tariff restrictions (imposition of import duty on goods entering
the country and thus making them costlier for purchasers in the home market of
the importing country) or non-tariff restrictions such as health laws that do not
permit import of agricultural goods from underdeveloped countries in USA and
some other countries on grounds of posing health hazard to the people. Such
physical restrictions and tariff as well as non-tariff barriers by USA and
countries of European Union have contributed to slow growth of exports from
India.
(iv) Disintegration of the Soviet Union: The Soviet Union/USSR was among
our largest trading partners and a big market for Indian goods. Its disintegration
caused a major setback to our exports.
Internal Factors
(i) Increasing Domestic Demand: Increase in income of people due to growth
of the economy has contributed to higher domestic demand. The supply side has
however not been able to match this increased demand due to slow growth in
agricultural and industrial output. Not much is thus left for exports as producers
sell bulk of output at home quite profitably. This reduction in surplus of goods
(over domestic consumption) for exports has contributed to their slow growth.
(ii) Low Quality and High Cost of Production: India emerged as high cost
low quality production country which could not face foreign competition either
at home or abroad. Hence, Indian goods were not favoured by foreign buyers
and, therefore, our exports. remained low.
Measures to Correct Deficit in Balance of Trade
The Government of India has been adopting and implementing various policies
for restricting imports and promoting exports to reduce trade deficit.

Restrictions on Imports
Following measures have been taken to regulate imports:
(i) Licensing of Imports: For quite a long time, the import of non-essential
consumer goods was not permitted while the importers of capital goods
essential for country's development were given import licences. However, now
under the liberalised trade policy, licensing requirements for most of the goods
have been abolished; only a small negative list of import items remains under
licensing system.
(ii) Tariff Restrictions: For the goods that are permitted to be imported under
licence from the government, further restrictions are imposed by way of custom
duties or import duties also called import tariffs. This means a tax is imposed on
the goods which arrive at the Indian ports and thus the price of such goods
becomes higher for the Indian buyers. The higher the rate of custom duty, the
greater is the price that Indian buyers need to pay for imported goods. These
high prices of imported goods are expected to reduce their demand in the
domestic market and thereby to restrict imports.
(iii) Quantitative Restrictions: The government may determine the total import
quota of goods, i.e., the total amount of goods that can be imported and allot
this quota to various importers. Nothing beyond the quota is allowed to be
imported. This naturally limits the quantity of imports. However, under an
agreement with the World Trade Organization (WTO), such quantitative
restrictions have been removed on many goods, while for others they are to be
removed in near future.
Export Promotion
With the continuing large deficits in India's balance of trade and limited scope
for imports reduction, the only long-term solution to the problem lies in
promotion of exports to earn sufficient foreign exchange to pay for our growing
imports. Export promotion measures opening up wider international market for
our entrepreneurs will stimulate industrial development in the country under the
incentive of larger world demand for our goods.
Export Promotion Measures: The export promotion measures adopted by the
Government of India include monetary and non-monetary incentives, fiscal
reliefs, credit facilities, establishment of institutions to help exporters as well as
strict quality controls and inspection of goods meant from export. Some of the
major steps in this direction are as below:
(i) Devaluatio: In July 1991, the rupee was devalued by about 20 per cent in
terms of major world currencies. This was expected to cheapen our goods to
foreign buyers thereby encouraging our exports.
(ii) Cash Assistance: Under this scheme cash assistance is given to exporters to
compensate them for indirect taxes (e.g., custom duties) levied on the imported
inputs that are used in production of goods for exports.
(iii) Income Tax Concessions: Income from exports is given several
concessions under the income tax laws. For example profits from exports are
totally exempted from income tax.
(iv) Import Concessions: Several concessions in imports of machinery,
equipment and technology are given to export production units. Export oriented
units are allowed duty free imports of machines, raw materials and technology.
Exporters are also allocated foreign exchange for import of raw materials used
in production of export goods.
(v) Concessional Bank Credit to Exporters: For financing production meant
for exports and also for financing exports themselves, banks give credit to
exporters at concessional terms.
(vi) Import Licences to Exporters: Since imported goods fetched very high
prices in the domestic market as their imports were highly restricted, the
exporters were granted licences for import of goods up to a certain percentage
of value of goods exported by them. This was expected to provide added
incentive for exports.
(vii) Issue of Exim scrips: The system of granting import licences to exporters
was later replaced by exim scrips. The exporters were given exim scrips
equivalent to 30 per cent of value of their exports. These exim scrips could be
used to import a large variety of items. The exim scrips could also be sold in the
market. Since these enjoyed a premium, the exporters could make additional
profits from their sale. This could act as a great incentive to exporters.
(viii) Convertibility of the Rupee: The system of exim scrips was also
replaced by partial convertibility of rupee in March 1992. Under this scheme,
exporters, who earlier had to surrender their entire foreign exchange earnings to
the Reserve Bank of India (RBI) at a rate fixed by it, were now obliged to sell
only 40 per cent of their exchange earnings at the official rate to the RBI. The
rest they were free to sell in the market at the market determined rate, which
was obviously higher than the official rate. This indeed was a great
liberalisation measure and a bigger incentive. In March 1997 even this was
replaced by a system of full convertibility of rupee on the trade account.
(ix) System of Advanced Licensing: Exporters are given advance licences for
duty free import of goods used in production of export items.
(x) Relaxation of Controls on Exports and Simplification of Procedures:
Controls on exports have been relaxed. Exports of many items have been
decontrolled while export procedures and formalities have been simplified.
(xi) Export Processing Zones: Many export processing zones have been set up.
The units operating there are allowed free trade with other countries. They also
enjoy various concessions like five-year tax holiday.
(xii) Export Promotion Organisations: Some such organisations are Export
Advisory Council, Export Promotion Councils, Directorate of Export
Promotion, etc.
(xiii) Export Import Bank: The EXIM Bank provides financial services to
exporters and importers and coordinates the work of other institutions engaged
in financing export trade. It pays special attention to export of capital goods.