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Published by: api-3771480 on Oct 16, 2008
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India\u2019s Foreign Trade
From A. K. Sengupta
Reading Materials

The world changed, and India changed even more: from an aid dependent country, notable chiefly for its past glory and current poverty, to an economic powerhouse widely expected to grow into not just one of the largest but also the most dynamic economies of the world.

For more than four decades since Independence, India had adopted a highly protected, regulated, restricted, and controlled policy towards an inward market approach and did not seem to have a policy of globalization as such. There have been policy attempts from time to time which either directly or indirectly had implications for globalization.

The year 1990-91 marked the end of the most protected trade regime phase in India and the country ushered into an era of globalisation. The continued deterioration in the economy due to the political instability, turmoil in Punjab, Kashmir, Assam and the rest of north east, and overspending by the central and state governments in an attempt to meet the new exigencies during 1980s had a worsening impact on fiscal sector and the external sector. In the fiscal sector, the current account deficit went up from 0.2 per cent of the GDP during 1974-79 to 1.6 per cent in 1980-85 and further to 2.3 percent during 1989-90. The negative trends in the external sector accentuated by the fall of the Soviet Union and the sharp rise in oil prices led to drop in India\u2019s exports to Eastern Europe from 20 per cent of total in 1989 to 11 per cent by 1991-92. Further the attack on Kuwait by Iraq disrupted the long-term supply contracts of oil to India from Iraq and led to a sharp rise in oil import bill for over two years. The net effect of these developments on India was that the import cover of the foreign exchange reserves came down from around five months in the mid- eighties to just 1.8 months by 1989-90. Short-term debt, which was 6.1 per cent of the total debt in March 1989, was pushed up to 9.9 per cent of the total debt in March 1990, and further to 10.2 per cent by March 1991. The ratio of short-term debt to total foreign exchange reserves \u2013 excluding gold and SDR \u2013 was 90 per cent

in March 1989. By March 1990 it was 2.2 times the reserves, and by March 1991 it
went up to 3.8 times the foreign currency reserves.

As the situation continued to worsen, India\u2019s international credit ratings were downgraded. India, therefore, had no other option except to mortgage 46.9 tonnes of its gold reserves to raise additional funds from the international markets to meet international obligations. In order to meet the above crisis, the Government of India initiated the reform process in 1991. The reforms included a programme of micro- economic stabilization, changes in industrial and trade policies with the aim of improving the efficiency, productivity and international competitiveness of Indian economy. Further, in order to get the Indian economy integrated with the world economy, the Government announced structural changes in its economic policies relating to exchange rate determination and management, industrial licensing, foreign collaborations, investment by NRIs, portfolio investments by foreign institutional investors, mobilization of funds by Indian commercial and industrial corporates from foreign countries, reduction in the tariffs (peak customs duty on non- agricultural imports has decreased from 300% in 1990 to 15% in 2005), simplification of export-import procedures, and so on.

Some of the key indicators of the reforms introduced by the Government directed towards
globalization include:

The launch of the New Industrial Policy in July 1991 which led to dereservation of the sectors kept in the domain of public sector in favour of private both domestic and foreign players. The effort towards opening of the economy can be gauged from the fact that out of the 17 sectors reserved for the public enterprises as many as 15 sectors have been opened for private participation. The two sectors viz. Atomic Energy and Railways have been kept reserved for the public sector because of strategic importance. Even within the railways \u2013 the peripheral services like catering, maintenance of platforms, palace on wheels, etc have been opened up.

To improve the efficiency and cut down the public expenditure investment norms
have been liberalized to attract inflow of capital from domestic and foreign

enterprises including institutional investment in various sectors like banking, insurance, transport, real estate, retailing etc. The inflow of private capital has not only improved the competitiveness of the Indian manufacturing sector but has generated large employment opportunities leading to rise in the standard of living of the people.


The opening of the telecom-IT sector has resulted into India\u2019s presence in the global marketplace and has been rated among the world\u2019s best. It is wrong to say that the fortune is confined to information technology and BPO, the growing increase in India\u2019s exports even without the help of a weak currency has led India to emerge as a powerful economy in the Asian region.

The reforms thus introduced in the policy frames have accelerated the growth rate from 5.7% in the eighties to what could well be a new trend growth rate of 7% now. The quality of this growth has improved remarkably: whether measured in terms of the units of capital required to produce a unit of output, foreign borrowings needed or the quality of the output, an indication of which is how much of it can be sold abroad.


India\u2019s share in world exports slipped from around 2 per cent in 1950 to the lowest ever level of 0.4 per cent in 1992-93. The economic and trade reforms introduced in 1991 have given a boost to raise its share to around 0.8 per cent in 2004-05. The Government is committed to double its share by the end of 2008-09. To achieve the above goal, the government had identified a 25 by 220 country-commodity matrix in its Medium Term Export Strategy 2002-07. The 220 items were classified into seven main categories that include engineering (including instruments and items of repairs), textiles, gems and jewellery, chemicals & allied products, agriculture & allied products (including marine & plantations), leather & footwear, and other items. Strategies suggested in the Medium Term Export Plan include (a) product-market penetration strategy for existing products (b) market diversification strategy for existing products (c) product diversification strategy for existing markets, and (d) product-market diversification for new products and new markets. Besides, having

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