Economic & Political
August 3, 2013 vol xlvIiI no 31
EPW Research Foundation
A Rethink onIndia’s Foreign Trade Policy
K Kanagasabapathy, Vishakha G Tilak, R Krishnaswamy
ver the last decade, India’s foreigntrade – exports and imports – hasundergone a signiﬁcant trans-formation both in terms of compositionof commodities and direction. However,foreign trade expanded over the period with dominance of import growth vis-à-visexports resulting in widening of thenegative trade balance. The trade policy announced on 27 August 2009, in thebackdrop of the economic crisis, kept theshort-term objective of arresting andreversing the declining trend of exportsand sought to provide additional supportto those sectors badly hit by the reces-sion in the developed world. Accordingly a policy objective of achieving an annualexport growth of 15% with an annualexport target of $200 billion by March2011 was set, and in the three years up to2014, the country was expected to comeback on the high export-growth path of around 25% per annum (Government of India 2009). Unfortunately, the growthtarget set for the years after 2012 turnedout to be too ambitious as exports declinedsharply in ﬁnancial year (
2012-13. Itis also recognised that in a fast-growingeconomy a rapid increase in exports isthe only option available to maintain thecurrent account deﬁcit at reasonable levels(Government of India 2011). Against this backdrop, this note pri-marily attempts to review the develop-ments in India’s trade over the lastdecade vis-à-vis global trends. Secondly,the note analyses the changing composi-tion and direction of India’s exports andimports (in terms of $). One signiﬁcantfeature has been that India’s exportsnever kept pace with imports during thehigh trade-growth phase. After analysingpossible reasons, the note ﬁnally attemptsto bring out some strategic steps thatmight be needed to correct the growingtrade imbalance.
1 India’s Place in Global Trade
India was one of the fastest growing econ-omies in the last decade, its merchandise-trade growth expanded more or less intandem with global trade. India’s trade overthe period showed remarkable increases,as its share in world trade went up from0.80% in 2002 to 2.13% in 2013 (Chart 1).But unlike its east Asian counterparts,India’s merchandise trade grew mainly dueto increased imports than that of exports. As a result, the trade deﬁcit acceleratedfrom a near balance in 2000-01 to as highas $191.7 billion in 2012-13 (Chart 2, p 138).
1.1 Elasticity of Trade to GDP
An attempt has been made to work outcrude elasticities of trade to gross domes-tic product (
over the period 2002 to2012 for India and the world (Table 1). Itis generally observed that India’s elastic-ity was signiﬁcantly lower compared to world trade during the whole of the period– both during the pre-crisis period as well as the post-crisis periods. It is there-fore the higher growth of
in India vis-à-vis that of the world, which hashelped India’s share in world trade growover the decade. But, since the crisis of 2008, not only has India’s trade elasticity come down signiﬁcantly to 1.9 from 3.8 inthe pre-crisis period, the real
growthis also converging more or less to the world’s
growth rate (Chart 3, p 138).Looking at both, lower
growth andlower elasticity of trade to
, the tradeoutlook for the near term is indeed bleak and requires some special attention andstrategic policy direction.
2 Direction and Composition
Both in terms of direction and compositionof commodities, India’s trade still remainshighly skewed despite some diversiﬁcationseen in the last few years. This is reﬂectedin the concentration of trade with a fewcountries, and in a few commodity groups.This tendency is evident both with respectto exports and imports. This makes India’strade vulnerable. The trade policy objec-tive of diversiﬁcation is yet to be achieved. Apart from this, what is also evident is the widening trade imbalance, which is biasedtowards imports rather than exports.
2.1 Direction of India’s Trade
Direction of trade data reveals that India’strading partners are about 230 countriesglobally. But, of these, more than 60% of trade volume (in $) is with 23 countries. Among these 23 countries, India dependson only four countries, viz, United ArabEmirates (
and Saudi Arabia, for more than 51% of trade. Suchan overdependence makes India’s tradeperformance vulnerable to any changesthat take place in these few countries.India has been consistently maintainingtrade deﬁcits with most of the top tradingpartners. In terms of trade vol-ume, the top 10 countries inorder of importance in 2012-13 were: the
, China, the
,Saudi Arabia, Switzerland, Ger-many, Singapore, Hong Kong,Indonesia and Japan, account-ing for 48% of total trade. Indiahad a negative trade balance with six of these countries, viz, China, Saudi Arabia,
Chart 1: Share of India’s Total Trade to World’s Total Trade*
* in terms of $ Million.Source: United Nations Conference on Trade and Development (UNCTAD).
Table 1: Crude Elasticities of Trade to Real GDPGrowth
(Average growth rate per annum %)
Period Trade GDP Crude(Constant 2005 US$) Elasticities@India World India World India World
2002-08 30.4 16.4 8.0 3.3 3.8 5.02009-12 13.4 4.7 7.1 1.7 1.9 2.82002-12 23.6 11.7 7.7 2.7 3.1 4.4
@ Average growth in Trade/Average real GDP growth.Data Source: World Bank and United Nations Conferenceon Trade and Development (UNCTAD).