Chapter

FOREIGN TRADE AN1

BALANCE OF PAYMENTS
NTS
1.
Meaning of International
Trade/Foreign Trade
PROBLEM
en aew
International Trade of India is the trade
of the world. It
includes import and between residents of India and ote
between India export of goods (merchandise) and residents of other coim
and United States is called International trade or services. For tries
Trade. The example trade
from India to other
countries will be known as
countries to India will be
Foreign
India's Exports on the other goods cons
hand goods
1.1
called as India's
Imports. coming from lgned
Importance of Foreign Trade ther
Foreign trade plays a
Foreign Trade is an engine significant
of
role in the
economy of each country. In the
resources and to economic growth." Foreign trade helps a country words
export its surplus production.
of Robertson
Son,
calamity it can import It can to utilize
import
foodgrains and other goods from abroad. technical know-how. At the its natural
importing necessary capital, A country can
time of natural
machines
more advanced and industrialise itself bu
By proper control of and raw materials from
foreign trade, employment, industrialised nations
development of the country can be influenced output, prices, industrialisation
acquire necessary assistance and other favourably. It is again foreign trade that and economic
reason why
Planning equipments for its economic enables a country to
in the Five Year Commission of India has development
given great importance to the
from
abroad. That isthe
Plans. development of foreign trade
2 . Foreign Trade
of India
Study foreign trade of India can be
of
divided into two parts:
(1) Foreign Trade of India before
(2) Foreign Trade of India after
Independence
2.1 Foreign Trade Independence
of India before Independence
India has been doing foreign trade
since ancient times.
Dacca (now in Bangladesh) were Artistic goods of India like of
renowned all over the world. the
Before 1947, India was a colony of musin
government. Because of this fact, the pattern of its Siu
foreign trade was like that of a
agricultural country. foreign trade was mainly restricted to Britain and
Its traditional, colo
used to export mainly primary goods, viz. other commonwealth counu
foodgrains and raw materials. Its imports were
comprised mainly of finished products. Study of India's also l
trade before independence can De divided
into the following parts: foreign di
(1) Volume of Foreign Trade: In the pre-independence volume of India's foreign
of India's
trade

was not much. In 1834, the total value of India's

period, tore
ime
itrose

foreign trade was 186crore. in

 Foreign Trade and Balance of Payments Problem 231

to 321 crore. Of it, the value of exports was 169 crore and that of imports 152 crore. In
1947-48, total volume of foreign trade rose to 792 crore (exports worth 403 crore and
importsworth 389 crore).
(2) Composition of Foreign Trade: Before independence, very few commodities were on the
foreign trade list. India used to export raw materials and agricultural commodities. Major
exports from India used to be cotton textiles, raw cotton, foodgrains, jute manufactures, tea,
and oilseeds. During this period, India used to import finished consumer goods, machines,
chemicals, iron and steel, etc. There has been lot of change in the composition ofIndia's
exports andimports after the world war I. In the year 1938-39 raw materials constituted 45
per cent of the total exports, in 1947-48 it came down to 31 per cent. The share of finished
products in total exports that stood at 30 per cent in 1938-39 went up to 49 per cent in
1947-48.

h . 3 ) Direction of Foreign Trade: Before independence most ofIndia'sforeign trade was with
Englandand Commonwealth countries. 34 per cent ofthe total exports went to and 31 per
centof thetotalimportscame from England. Besides, the share ofotherBritishcolonies,tike
Burma, Canada, Sri Lanka, etc., in our export trade was 21 per cent and in import trade 10
per cent. During this period, the share of America in India's total imports was 7 per cent and
in India's exports 8 per cent. In the year 1947-48, the share of England in India'simporttrade
fell to 25 per cent and that of America rose to 30 per cent. Share of Russia and countries of
eastern Europe in our foreign trade was very little.
(4) Balance of Trade: Before independence, India's foreign trade used to be a surplus trade.
Our exportsused toexceed imports. In 1939, balance of trade was favourable to theextentof
enoe 17 crore and in 1946-47 it was favourable to the tune of T31 crore. However in 1947-48,
o ss dthe extent of favourable balance of trade was reduced toR 14 crore only.
In short, before independence India's foreign trade was organised on the basisofthe policy framed
by the British government. The sole objective of this policy was to reduce this country to thepositionof
mere supplier of raw materials so that finished products made by factories in England may find a ready
market here. British government was in favour of keeping the foreign trade of India as a surplus tradeso
that the foreign currency so earned by India could be utilized in making payment for the 'Home Charges'
incurred by the British government in England on the administration of India.
2.2 Foreign Trade ofIndia after Independence
after 1951 when India launched itsFirst FiveYear Plan,
Inthe post independence period, especially
itsforeign trade underwent a good deal of transformation. This will be studied in
change four parts:
(i) Volume of Foreign Trade, (i) Composition of Foreign Trade, (ii) Direction of Foreign Trade,
(iv) Balance of Trade.
() Volume of India's Foreign Trade
n
During this period, volume of India's foreign trade increased substantially. In 1947-48,thevalue of
crore. After 1951, due to significant
al India's foreign trade was 792 crore. In 1951, it rose to 1250
t transformation. Now this trade was no longer
ndustrial progress, foreign trade underwenta complete
nd relations with almostall countries ofthe
Testricted toa few countries and a few goodslndia hadnow trade
Orid and there were thousands ofgoods on import and exportlist) In the post-independence periodand
ed

de
LngFive Year Plans, volume of India's foreign trade has witnessed significant growthas shownin Table 1
oSe
 232 o Indian Economy
Table 1. Volume of India's Foreign Trade crore)
Year
Imports Exports Total
1950-51 650 600 1,250
1960-61 11122 642 1,764
1970-71 1,634 1,535 3,169
1980-81 12,549 6,711 19,260
1990-91
43,193 32,558 75,751
2000-01
2,30,873 2,0p,571 4,34,444
2010-11 16,83,467 11,42.649 28,26,116
2013-14 27,15,434 19,05011 46,20,445
2016-16 27,37,087
(Source: Economic Survey, 2015-16;
18,96,348 a 5 4 ol67%
RBI Bulletin, April 2016)
It is clear from the above table that:

(1) Volume of foreign trade in 1950-51 was

1,250 crore. In 2014-15, it increased to R 46,33,435
Volume of foreign trade increased by 3,706 times. (2) In 1950-51, total crore,
27,37,087 crore in 2014-15. Thus imports increased by imports were 650 crore which
rose to
4,211 times. (3) In 1950-51, value of total
exports was 600 crore. It rose to 18,96,348 crore in 2014-15.
times. Despite various Thus, exports increased by about 3,160
export promotion schemes, our exports are still less than
many years growth rate of exports is less than imports. Moreover, in last
rupee terms
growth rate of imports. In
2010-11, growth rate of exports in
was35.l per cent and growth rate of
exports in rupee terms was () 0.5 per cent and imports was 23.4 per cent. In
2014-15,
growth rate of imports was 0.8 per cent. growth
rate of
(11) Composition of Foreign Trade of India
After independence and
during five year plans, there has been
composition of India's foreign trade. Earlier India used to export only
good deal of change in the
etc. but now India is also traditional goods like tea,
exporting modern goods like software, jute, skins,
earlier we were importing finished readymade
goods but now various capital goods, raw garments, etc. In imports also
(A) Change in Composition of materials are also imported.
After 1947, there have been
Exports ibol fo obevf oo
India used to export significant changes in India's exports trade. Before
mostly tea, jute, textiles, hides and
large variety of finished products is skins, iron ores, cashew and independence,
being exported, e.g., capital spices, etc. Now a
chemicals and chemical products, goods (machines), engineering
readymade garments, diamonds,
1950-51, conventional exports from India
goods,
processed
namely tea, jute and agricultural food, handicrafts, etc.
cent of its total exports. In products comprised ofbo p
2014-15, its share came down to
12.7
engineering goods which was just 0.06 per cent in 1951 per cent. On the contrary, share
o
the composition of exports are increased to 22.9 per cent in 2014-15.
shown in Table 2. Changes ln
omATtO7 Beloudnoud Aktunelmemas
Slasknisd husdudi a9So -5 19Go-41 12o1S-6
19s6 3 3ot
 Foreign lrade a n Balance or
rayments Prot
Problem

tal
Table 2.
Change in 233
Commodity Composition of India's
230 Exports ( crore)
Tea
1950-51 1990-91
64 2014-15 16
Jute M a n u f a c t u r e s 80
1,070 4,171 7
69 114
Cotton Cloth 298 2,242
138
Rice 2,100 57832 <29
Readymade Garments 462 48028 31 8o
iron Ore 4,012 +92943 p
18
Engineering Goods 1,049 3,211
0.4 3,872
Coffee
10
433,868 3,$6,0
252 4,973
Chemicals
05 2,111
Gems and Precious Stones 2,28,282
5,247 2,52,208
Total Exports(Including others) 600 32,553 18,96,348
CIOR (Source: Economic Survey, 2015-16; DGCIS
The above table reveals the Report, 2015-16)
following important changes in the composition of exports:
(1) Decline in Percentage Share of
TO Agricultural Products in Total Exports: Since
16 independence the percentage share of exports of agricultural products in total exports has
been declining. For example, in 1990-91 the
last agricultural products contributed 19.41 per cent
of total export earning. It declined to 12.7
per cent in 2014-15. The main reason of this
decline is the increase in domestic demand of agricultural products due to increase in
population. Hence the availability of agricultural products for exports has considerably
declined.
(2) Decline in Percentage Share of Conventional Items in Total Exports: At the time of
independence the important commodities inIndia's export basket were jute, tea, foodgrains
and minerals. Together they contributed more than 41 per cent of the export earnings. In
2014-15 the combined share of these conventional items fell to 14.2 per cent. The main
cause behind this fallis the increase in domestic demand of foodgrains and raw materials due
tO increase in population and industrialisation of the country.

) Increase in Percentage Share of Manufactured Goods in Total Exports: Since

independence the percentage share of manutactured goods in total export earning has
increased considerably. In 1970-71 the percentage share of manufactured goods in export

earnings was 56 per cent, by 2014-15 it increased to 6. per cent.

Increasing Importance of Exports of Gems and Readymade Garments: Export of
has emerged as an important foreign
gems, engineering goods and readymade garments
The export of gems enjoys the third place in the total export
exchange earner in recent years.
earnings.
(5) Since independence the composition
Change in Composition of Agricultural Exports:
of the exports of agricultural products has undergone considerable change. In 1990-91, the
value of exports of coffee, tobacco and fish were 252 crore, 7 263 crore and
960 crore
increased to R 4,973 crore,
respectively. But in 2014-15 the value of the exports of these items
 234

5,869 crore and 33,688 crore respectively. The

share of fish
Indian Economy
earnings has increased considerably. In 1990-91 the and fish preparali.
2014-15, rice worth 48,028 crore were
exported. It is
ations
export of rice was just z469 . in export
(increase in fish production) and 'Green Revolution' mainly the result of 'Blhto D. Butin
export of jute has not shown any worthwhile (increase in agriculture e evoluion
(6) Exports of Petroleum Products:
increase. production .The
Due to
exporting petroleym, products. In 1990-91,enhanced refining capacity, India has al
exported. In 2014-15, these increased to petroleurm products worth 948 e en
petroleum industry has been developing, 3,50,993
11 5576 crore. It is an evidence of the were
(7) Increase in that
Exports of
Engineering Goods, Handicrafts
Consequent upon the
programmes industrialisation initiated
of
and
Leather Prode
export of engineering goods rose during plannings ucts:
substantially.
and leather products also increased anning
Similarly, value of exports
the period,
considerably. In 1990-91 the of handicra
engineering goods, handicrafts and leather value of exnorts
2,600 crore respectively. In products was 948 crore,
6,167 crore and
,16,S3432
, cu 2014-15 the value of exports of these
68 crore, R16,728 erore and 37,853 items increased to
goods enjoys the second place crore réspectively. The export
in the total
merchandise export earnings of theof engine g
(8) Increase in Exports of Services: country.
India is exporting
other information technology related software, consultancy services
services. In 2014-15, and
exports was 32.6 per cent. Exports of services the share of services in total
are rising by 7.5
last five years. per cent per annum
In short, there is
during
increasing trend in the
export of raw materials. This is good for the exports of manufactured goods and declining trend in the
health of Indian
(B) Change in economy.
After independence,
Compos ition of Imports
composition of India' s
imports of foodgrains, cotton, jute, etc. increased import trade has undergone many changes. By 1975,
much. Imports of
iron,non-ferrous metals, industrial raw petroleum, chemical fertilizers, steel,
stones, etc., have increased. Changes inmaterials,
the
machinery, capital goods, edible oils, un-cut precious
composition of India's
Table 3. Change in Composition of India's imports are shown in Table 3.
Imports crore)
Commodity 1950-51 1990-91 2014-15U0
Tron and Steel
20
Machinery 2,113 99768 97
91
4,240 1-86,247
Transport Equipment 41
1,670 1,12,521
Foodgrains 100
Chemicals
182 44,240 b0
0.57 2,289 1,45,919
Fertilizers 12 1,766 45,295
Paper, paperboard 10
456 26,591

Petroleum 87
10,816
t074e d
Total Imports (Including others) 650
43,198 27,37,087
(Source: Economic Survey, 2015-16; DGCIS Report,
2015-16)
The above table shows that in 1950-51 foodgrains were the major importi
item. But in 2014-15,
percentage share in total import has comedown to a very small level. On the other hand, import ofpetrolet
 nd Balance of Payments Problem
Foreign Trade 235
at
87, crore in the total imports in 1950-51 went up to 8,42,874 crore in 2014-15. It becomes
stood
table that the
that the above following changes have taken place inthe composition of imports:
dearfrom in the Imports of
(1, Decline Agricultural Products: The imports of agricultural produ
fell considerably. Agricultural products include foodarains, edible
oils, raw cotton, was 15.4
cashew nuts, etc. In 1990-91, the share of agricultural products in the total imports raw
Der cent which came down
to-per cent in 2014-15.
4.L
(2) Petroleum Products Enjoy First Place in Imports: There has been substantial rise in the
import expenditure on petroleum products. For example, in 1990-91 the import ol
amounted to R 10,816 crore but in 2014-15 it rosetoR8,42874 crore. There are two reasons
for this increasing trend, firstly increase in the prices of crude oil and secondly increase in thne
demand of petroleum products for the expanding industrial and transport sectors.
(3) Increase in the Imports of Capital Goods: Consequent upon the programme of
industrialisation initiated during the planning period import of machines, electrical
equipments, metals, transport equipments, etc. increased considerably. For example, in
2014-15 the expenditure on imports of capital goods increased to 3,26,419 crore from
10,466 crore in 1990-91. However, in percentage terms the share of capital goods in total
imports declined. In 1990-91 its share was 24.2 per cent which declined to 11.9 per cent in
2014-15.
(4) Increase in Imports of Raw Materials and Intermediate Goods: There has been
substantial increase in the expenditure on imports of raw materials and intermediate goods,
In 1990-91 expenditure on imports of raw materials and intermediate goods was 75.8 per
cent of the total expenditure on imports. It increased to 84.2 per cent in 2014-15.

5 )Increase in Imports of Chemical Fertilizers: Imports of fertilizers have increased

from 1,766 crore in 1990-91 to 45,295 crore in 2014-15. This is due to increase in prices

of fertilizers and increasing requirements of fertilizers for the implementation of

new

agricultural strategy.
the share of raw
In short, the imports of foodgrains have declined sharply. On the other hand,
materials, petroleum and capital goods has increased considerably.
(l1) Direction of Foreign Trade
countries of OECD, i.e., European Union,
The foreign trade of India mainly takes places with the
likes Iraq, Iran, Saudi Arab and
North America, Australia, New Zealand, Japan; OPEC countries
clear from Table 4.
becomes
developing countries. The direction of India's foreign trade
Trade (2014-15)
Table 4. Direction of India's Foreign
Percentage of Exports Percentage of Imports
Country 1.1
OK 3:0
5.7
2USA 137 15:4
4-7 6 2-3-84
3apan 6 S a e 0 - 7 o:6 09 1
ARussia
8 China 8-935 t3:5 16
15.9 11.0
6 EU
30.6
7.OPEC 0boc 18.2
44-0 46 39-0 43-
8. Developing Countries
(Source: Economic Survey, 2015-16; RBI Bulletin, April 2016)
 236
Indian EcOnomy
(A) Changes in the Direction of Foreign Trade
Direction of India's foreign trade has undergone a substantial change after independon
ependence and then
after disintegration of USsSR. To facilitate the study of direction of trade, different countries
es have bee
classified in four categories. Changes in the direction of foreign trade are shown Table 5:
Table 5. Change in Direction of India's Foreign Trade
(Percentage of Total Volume)

Country/Economic Group 1980-81 1990-91

2014-15
Exports Imports Exports Imports Exports m
I. Organisation for Economic Co-operation and 46.6 45.7 56.6 57.2
ports
35.3
Development (OECD) Countries 26.9
I1. Organisation of Petroleum Exporting Countries 11.1 27.8 5.6 16.3 18.2 30.6
(OPEC)
11. Easten Europe 22.1 10.3 17.9 7.8 1.1 1.7
IV. Developing Countries 19.2 15.7
17.118.7 44.0 39.0
(Source: Statistical Outline of India, 2012-13; RBI Bulletin, April 2016)
Table 5 highlights the following points:
(1) Organisation of Economic Co-operation and Development (OECD): It includes
countries of: (i) European Union (EU) which includes UK, Germany, Italy, France
Luxemburg, Netherland, Ireland, Belgium, Denmark, etc. (i) North America (USA and
Canada), (ii) Oceania countries, i.e., Australia, New Zealand, Japan, etc.In thelast 34years
exports to these countries declined, i.e., from 46.6 per cent to 35.3 per cent of thetotal
exports. In the same period imports also declined from 45.7 per cent to 26.9 percentofthe
total imports.
(2) Organisation of Petroleum Exporting Countries (OPEC): Share of OPEC,i.e., Saudi
Arabia, Iran, Iraq, etc., in our export trade in 1980-81 was 11.1 per cent which increased in
2014-15 to 18.2 per cent. Similarly, share of these countries in our import tradeinceasedtom
27.8 per cent to 30.6 per cent.
(3) Eastern Europe: Share of Eastern European countries, viz., Russia, Bulgaria, Yugoslavia
Komania, Czechoslovakia, etc., in our foreign trade has gone down considerably.in1o
their share in our exports was 22.1 per cent which came down in 2014-15 to just1.lper
ation
Similarly, in imports it declined from 10.3 per cent to just 1.7 per cent. After the disintegrau
of USSR, foreign trade with these countries has shrunk very much.
the
been on
(4) Developins Countries: India's foreign trade with developing countries hascent whichin
increase. In 1980-81 share of these countries in our exports was 19.2 per cent o 3 9
2014-15 rose to 44 per cent. Likewise, their share in our imports rose from lo.p dastheth
per cent. It mainly includes trade with Asian countries. In 2014-15, China emergeda
ndia.
major export destination for India and it has become the largest source of impor In
place.
In India's exports, developing countries occupy the first and OECD nationst h
the
e second

India's import trade also, developing countries occupy the first and OPEC the second place
Foreign Trade and Balance of Payments Problem 237

(B) Changesinthe Direction of Exports Explaiu a b )

After independence, main changes in the direction of exports from India are as follows:
(0) Before independence, maximum exports from India went to England. Jn 1950-51,
osEngland's share in Indian exports was 27 per cent. It was reduced in 2014-15 to just 3per
cent.
db(i) In 1980-81, share of USA in India's export trade was 11.1 per cent. Now it is-+197 per cent.
Thus, exports to USA have been rising.
54
(iil) India's exports to EU countries are rising. These include, England, Germany, Belgium,
France, Luxemburg. Netherlands, Italy, Denmark, etc. In 2014-16, their share in our
exports was l5 per cent.
(iv) Organisation of'Petroleum Exporting Countries (OPEC): In 2614-16, share of these
countries in our total export trade was 18,2-per cent.
(v) In 1980-81, share of USSR in our export trdde was just 18.3 per cent. But in 2014-15, it fell
to 05per cent. Because of disintegration of USSR, India's trade with Russia has decreased.
(vi) Role of Japan in our export trade is reducing. In 1950-51, Japan's share in our export trade
was just 2.2 per cent and in year 2014-15 this share was 1.3per cent.
(vi) India has been increasingly exporting to many developing countries like China, Kenya,
Ethopia, Nigeria, Argentina, etc. Exports to developing countries have been rising constantly.
In 2014-15, this share was 44 per cent
(vii) In recent years, India's export to China is rising. In year 2014 15, 3.gper cent of India's
exports were to China.
In 2014-15, top five countries to whom India exported were USA, Hongkong, China, UK and
Germany.
(C) Changes in the Direction ofImports
In the post-independence era direction of imports in India has also undergone a change:
() Before Independence, most of imports in India used to come from England, In 1950-51,
share of England in import trade was 18.5 per cent. Now it has reduced to just 11 per cent.
sb(i) In 1950-51, India's imports from USA were the maximum. Its share in total imports was 18.8
per cent but in 2014-15 it has gone down to 4per cent.
(ii) India's imports from EU countries, viz., UK, Germany, Italy, France, Luxemburg,
Netherlands, Ireland, Belgium and Denmark are rising. In 2014-16, share of these
countries in total imports was 11per cent.
(iv) Organisation of Petroleum Exporting Countries (OPEC): Large quantity of imports
comes into lndia from OPEC countries like Saudi Arab, Iran, Iraq, Kuwait, etc. In 201315,
share of these countries in the total imports was 30 per cent.

o ()USSR: After disintegration of USSR, importsfrom these countries have fallen very much.
Import trade with Russia has been reduced to just p e r cent
sno (vi) Japan: India' s imports from Japan have remained almost same in peyceptage terms, In
1950-51, share of Japan in our import trade was just 2.9 per cent. In 2013-16,it was 25per
cent.
bos
brs e
 Indian Economy
238 trade with developing countries has
has hn.
Countries: India's foreign been on the
(vii) Developing
these countries in India's import
trade has increased to rise
se
In 201915,
share of per cent
Imports from Asian
and African countries have
also looked up.
32
trade with China IS increasing at a faster rate. In
n ioavt
year 2014
(uiil) In recent years India's foreign
India's imports were from China. Lol 14
63, 135per cent of
i 2014-15, top five countries from where India imported the most were China, Unitod Arab
Iraq and Korea.
Emirates, USA,
(IV) Balance of Trade of India
Balance of trade is the difference in the value of total exports and imports of visible materialoo
Our imports have continuously been more than our exports, resulting in untavourable balance oftrado l
goods
e. It
was for the first time in 1972-73 that lIndia's balance of trade turned favourable. In 1976-77, once morof
turnedouttobe favourable. Our imports have increased very much since independence butimports haue
exceeded the exports. India's balance of trade in different years since independence is shown in the
following Table 6.
Table 6. India's Balance of Trade
Years Balance of Trade Years Balance of Trade
crore) crore)
1950-1951 50 1990-1991 10,635
1960-1961 480 2000-2001 27,302
1970-1971 99 2010-2011 )5,40,818
1972-1973 (+) 104 2012-2013 10,34,843
1976-1977 (+) 72 2013-2014 8,10,423
1980-1981 5,838 2014-201
(Source: Economic Survey, 2015-16 and RBI Bulletin, April 2016)
&RLTable 6 shows that India's balance of trade (imports-exports) since independence has been in deticit
except the year 1972-73 and 1976-77. In 2014-15, deficit in balance of trade
in
was7 8,40,739 crore. 1his
deficit is increasing almost every year and it is a matter
of great
concern for our There are many
economy.
causes of disequilibrium in India's balance of trade.
For instance, (1) large imports of machines, (2)
in the import of war equipments, (3) increase in increase
import of petroleum products and price-hike of peroleu
products, (4) relatively less increase in export trade, and (5) fall in demand for
exports.
3. Main Features of India's Foreign Trade
Salient features of India s foreign trade since
independence have been as under
(1) Increasing Share of Gross National Product: India's foreign trade has great sign
for its GNP In 1950-5 India's foreign trade
(import texport) constituted 12 per
d

gross national product. In 2014-15, it increased to 52.8 per cent of gross national

(2) Less Percentage in World Irade: Share of India's foreign trade in the wordtra
going down. In 1950-51, India's share in total export trade of the world wasio
in total import trade it was 2 per cent. In 2014-15. this share was 2 per cent in e x

trade.
2.56 per cent in import