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India’s Trade and Investment Context

Recent Developments

Rupa Chanda

• Key features of India’s trade & industrial policy reforms

• India in the global economy-current status

– Outcome of reforms

• Characterizing India’s trade and investment flows

• Manufacturing versus Services

• Impact of current global crisis on India’s real sector

Key trade and industrial policy reforms

1. Industrial liberalisation & deregulation :

 Industrial Policy statement (1990)

• Investment ceilings in plant and machinery for manufacturing units raised

• De-licensing of industries, breakdown of license raj
• Equity ceiling for investment abolished
• Greater thrust to export oriented units
• Elimination of MRTP Act
• Public monopoly eliminated in several sectors with limited public sector
monopoly retained in only 8 strategic sectors
• FDI permitted upto 51% through automatic route in several sectors
 2. Trade liberalisation

• Eliminated import licensing for most industrial & intermediate goods,

eliminated for consumer goods in 2001

• Top tariff rates reduced (mainly for non-agricultural goods; tariffs in agri
continue to be high)
– from 335% in 1990-91 to 10% in 2007-08
• Rationalization of tariff lines
• Export control policy relaxed
– Prior to July 1991, 439 items subject to export control
– Reduced to 296 in March 1992 EXIM policy, decreasing ever since

• Removal of exchange controls

• FDI liberalization especially in services- banking, insurance, telecom, energy

• Conscious export thrust to selected sectors

 3. Other Structural Reforms

• Introduced Disinvestment as specific policy measure inn1992 but has been an

on and off saga in India

• Active privatization policy post 2000

– Department of Disinvestment set up – strategic sales of PSEs

• But disinvestment policy took a setback with some controversial proposed

sales of PSEs which were stayed by Supreme Court

• Progress in reducing reservation list for small scale industries

• Progress still required on infrastructure reforms and labour law reforms

 India in the global economy- current status

 Outcome of Reforms

• Economic liberalization and structural reforms undertaken in
past decade have contributed to higher growth, enhanced
competitiveness, increased integration with the world

• Emerging success in various sectors of the economy is putting
India on the global map

• Large and growing domestic market is creating significant
business opportunities for domestic and foreign firms

• Availability of skilled and low cost manpower makes India an
important base for value added manufacturing and
knowledge-based activities

Indian Economy: Vital Statistics
Size of the economy 12th largest in USD terms
USD 5.16 trillion in 2007-08 (at PPP) – 3rd largest economy in the world
after US & China
Per Capita income and PCI risen from 19245 in the early 1990s to 29786 in 2007-08 - rate of growth
consumption = 7.2%
Rate of growth of Per capita final consumption rose from 2.6% in 1990s to
5.1% in 2004-05
Trade/GDP ratio ↑sed from 29.2% in 2000-01 to 48% in 2006-07
Share in world trade
Share in 1990 2000 2007
Merchandise trade 0.58% 0.01% 1.29%
Services trade 0.62% 1.17% 2.06%
Total trade 0.59% 0.802% 1.43%

Projected to ↑se share in world trade to 5% by 2010

Size of the Indian market India to be the fifth largest consumer market in the world by 2025 from
twelfth in 2005, (study by McKinsey Global Institute.) Aggregate Indian
consumer spending is likewise estimated to more than quadruple to
approximately US$ 1.5 trillion by 2025, on the back of a ten-fold
increase in middle class population and a three-fold jump in
household income.
India: Performance in the External Sector
India’s integration with the world over the years

1990/91 2007/08

Peak import duties (manufacturers) 200% plus 10%

Import controls Tight, detailed Almost gone

Trade to GDP (%) 14.6 48%

Current receipts to GDP (%) 8.0 24.5

Software (IT-BPO) exports ($ bn) Nil 40.8

Workers’ remittances ($ bn) 2.1 24.6

Foreign investment ($ bn) Negligible 22.95

Foreign currency reserves ($ bn) 2.2 245.86

• Rate Rupee – USD 17.94 40.24

Exchange Rate Rupee – Euro (wef 1999) 44.79 56.99

 But contrast with China remains:

 Trade in goods and services as share of GDP: India- 48 percent, China- 65 percent
 Share in world goods exports: India -1 percent, China - 6.5 percent
Note: India’s growing importance as a recipient of FDI
India’s ranking in world economy : Global Competitiveness Index and other rankings
• India has been integrating with the world economy since initiation of
reforms in 1991
– significant improvement in economic performance since reforms
– many areas of inherent strength
– many emerging opportunities

• But:
– Need implementation of various structural and institutional
reforms, greater investment in infrastructure, and improved

 Key features of India’s

 trade and investment flows
India: Main Trends in Trade
Composition of trade: merchandise vs services
Growth in trade over the years in absolute terms
In USD 1980 1990 1995 2000 2007
Merchandise Exports 8585.54 17969.1 30630 42379.3 145431
Imports 14864.4 23579.6 34706.9 51522.9 215500
Services Exports 2971.26 4624.86 6774.72 16683.7 84838
Imports 2981.25 6089.55 10267.8 19186.7 48073

Change in share of merchandise vs services

 Share of agricultural products in trade has declined
 Share of oil, petroleum & related products in trade has grown
0.54% in 1970-71 to 2.88% in 1990-91 to 15.64% in 2007-08
Import share ↑ from 8.32% in 1970-71 to 25.04% in 1990-91 to 33.23% in 2007-08
Trends in Services Trade
Changes in direction of trade 1990-91 and 2007-08



FDI into India : status 2008

 Main sectors attracting FDI into India

Main countries investing in India 

Composition of approved outward FDI from India ( million
of USD )
Year Manufacturing Financial services
Non - financial services
Trading Others Total

Amount % Amount % Amount % Amount % Amount % Amount

1999 - 00 535.8 30.9 4.3 0.2 1130.7 65.3 58.3 3.4 2.3 0.1 1731.5

2000 - 01 370.7 26.8 16.6 1.2 876.5 63.4 89.2 6.5 29.1 2.1 1382.2

2001 - 02 2210.9 73.0 48.6 1.6 565.5 18.7 139.2 4.6 62.3 2.1 3027.0

2002 - 03 1056.7 71.8 1.8 0.1 280.2 19.0 69.9 4.7 63.7 4.3 1472.2

2003 - 04 504.5 55.7 35.1 3.9 223.3 24.6 37.0 4.1 106.3 11.7 906.3

Total 4678.7 54.9 106.4 1.2 3076.2 36.1 393.5 4.6 263.7 3.1 8519.2
1999 / 03

Note: Growing outward investment from India in manufacturing and IT services

• Does India’s trade structure reflect its comparative advantage in low skilled, labour
intensive manufactures?

• No – various policy induced constraints have prevented India from exploiting its
comparative advantage in less skilled labour intensive production
– India’s top few commodity exports are largely capital intensive (iron and
steel, petroleum, non metallic mineral manufactures)
– Contrasts with China’s mass exports of apparel, toys, footwear,
– India is more specialized in capital goods industries
– Spends less on imports of capital equipment, machinery, supplies as share
of import expenditures compared to China

• Trade composition also reflected in slower growth of Indian manufacturing in trade

and foreign investment

• Top sectors receiving FDI in India included services, several capital intensive
manufacturing industries (chemicals, electrical equipment), while higher share
of total FDI goes to manufacturing (70%) in China

 Manufacturing versus Services

Salient features of Manufacturing versus Services in India

• Typical transition of an economy is from Agriculture  Industry  Services

• But India has experienced substantial reduction in share of agriculture in GDP
with decline being absorbed by services, industry (manufacturing)
remained largely stagnant

• Clear divergence in performance and extent of integration between
manufacturing and services with respect to trade, FDI, competitiveness,
penetration of world markets

• But improved growth and trade and investment performance in services not
accompanied by commensurate increase in employment
– Services contribute over 60% to GDP but only 35.5% to employment,
compared to 50.2% employed in agriculture,14.3% in industry

Growth Performance of the Indian Economy

India: GDP Growth (1980-81 to 2007-08)

Trends in Composition of GDP
State of employment: important indicators
Trends in Services trade

 India's growing RCA in services

Increasing share in world trade

• Two arguments made to defend India’s emphasis on services

• Shift towards capital and skilled labour intensive technologies emerging in world
economy, traditional path no longer available
– But technology in industries such as apparel, footwear, travel goods not
changed so much, still employ large numbers of unskilled workers, still
offer more scope for employing low skilled workers

• India can follow different model of growth by relying on services rather than
– Despite strong growth of software and other services in recent years, still
small share in economy, very small contribution to employment, low
employment intensity
– Not feasible to move significant number of workers from agriculture into
formal service sectors, but possible to move into formal semi or low skilled
manufacturing activities
– Need for higher education and commensurate investment in higher education
by government for resource released from agriculture to transition to
– Higher education spending declining as share of GDP

• India cannot skip the industry stage

• Divergence in manufacturing and service sector performance
raises questions about:

– Policy and structural environment affecting both sectors

– Employment creation prospects

– Realizing balanced growth

– Realizing social equity objectives

– Intersectoral linkages and spillover effects

Impact of the current global crisis on
India’s real sector
Outlook for the Indian economy

• Downward revision of growth estimates for Indian economy in 2009 –
– World Bank Global Economic Prospects: 5.8%
– Goldman Sachs: 5.8%
– Citigroup: 5.8%
– IMF: 5.1%

• PM’s Economic Advisory Committee- Indian economy likely to remain weak in first
quarter of 2009-10 , but higher forecast growth of 7 or 7.5%

• Will start recovering in Oct 09 – March 2010 period

• EAC’s current account projections bit optimistic

– 4% in first half of current fiscal, practically zero deficit in second half
– 1.9% deficit for 2008-09,
– 1% CA deficit for 2009-10 projected
– Banking on continued invisibles growth- but IT, remittances likely to be hit

Outlook 2009: EAC’s Review of the Indian Economy 2008-09
 Impact on the real economy

• Growth down to 7.7% in 1st quarter of 2008-09 (vs. 9% in 2007-08)

• Merchandise exports fell by 12% in Oct 08

• Industrial growth turned negative in Nov 08 for 1st time in 15 years

• Rupee depreciated by 20% against US $ in past few months

• Forexreserves down by over US$ 60 bn since March 08

• Net outflow by FIIs: US $6.4 bn in April – Sep 08

• External commercial borrowings declined from US $7 bn USD in Apr –
Sept 07 to US $ 1.6 bn in Apr – Sept 08

Impact (contd.)
Impact on Indian Exports
• Sharp decline in export value despite depreciating rupee
– Shrinking demand in major markets (US, EU) and cancellation of
– Defaults on payments by international buyers
– letters of credit being cancelled by banks

• Export growth down to 10% in dollar terms in Sept 08, compared to 26.9%
in August 08

• Trade deficit for April – November 2008 increased to US $ 84.34 bn from
US $ 53.19 bn in previous year same period

• FIEO fears job losses to the tune of several lakhs by March 2009

• Layoffs in several export oriented sectors (textiles, leather)

 Sector level impact

• Textiles industry unlikely to meet export targets
– Negative export growth expected this year
– 2nd quarter results of 50 major textile companies were negative
– problems magnified by rising cotton prices, aggressive pricing by China

• Auto industry affected by demand recession and liquidity crunch – negative growth for
many majors (Tata Motors, Mahindra, TVS Motors)

• IT Industry: NASSCOM has lowered targets for this year

• Other exports (Oct 08)
– Handicrafts: -70%
– Tea : -20%
– Carpets: - 32%
– Oil meals: -50%
– Man made yarns: -17%
– Cotton yarn: -19%
– Marine products: -19%

• Bulk cargo rates down 50% reflecting slowing demand
Government measures and responses
• Eased access to overseas loans:
– ECBs relaxed for permissible uses
– Non-banking financial companies dealing exclusively with
infrastructure financing permitted to access ECBs

• Enhanced credit flows
– SPV to be designed to provide Rs 25,000 crore support
– Rs 20,000 crore re-capitalisation plans for banks over next two

• Boosting exports:
– Duty drawback benefits for knitted fabrics, garments, bicycles
– Central govt committee to review “procedural delays” and fast
track approvals
– EXIM Bank obtained credit line of Rs 5000 crore from RBI to
provide credit to exporters at competitive rates
• Monetary easing
– Repo rate (the rate at which banks borrow from the RBI) cut by 100
basis points to 5.5%
– Reverse Repo Rate (the rates at which banks lend to the RBI) cut by
100 basis points to 4%
– CRR (the amount of cash balances banks must keep with the RBI)
cut by 50 basis points to 5%

• Fiscal stimulus
– Two fiscal packages together to cost the government Rs 56000

• No more stimuli – says the Planning Commission

• Lack of fiscal slack to give huge stimulus package unlike that in China
Industry responses
 CII Eleven Point Agenda:

Key issues to be addressed:

• Domestic liquidity shortage

• Exchange rate volatility and reduction in access to foreign currency funds
• Inadequate credit availability and slowdown in demand
• Decline in business and investor confidence and optimism

 Recommendations:

(1) Domestic liquidity and interest rates

– Further reduction in repo rate by at least 50 bps, in CRR by 150 bps to ensure
adequate liquidity and reasonable cost of funding
– Provision of liquidity to mutual funds and NBFC sectors, to enable orderly
operation of financial markets
– Guarantee for all bank deposits for two year period to maintain depositor
confidence in the banking sector

2. Foreign exchange management
– Focused exchange rate management to prevent volatility without reducing
rupee liquidity
– Permit higher levels of FDI to attract foreign capital
– Utilization of forex reserves for meeting critical foreign currency needs
– Remove cap on NRE and FCNR(B) deposits.

3. Credit flow and impetus to growth

– Establishment of corpus lending to SMEs
– Speedy release of government funds for various projects
– Fast tracking of all infrastructure projects to spur investments and growth
through inter-sectoral linkages.

4. Communication
– Comprehensive communication exercise by Government and regulators in
consultation with industry to articulate approach to mitigate risks from
global financial crisis and strengthen confidence in the economy
 Responses from CEO Survey 2009:

• Need increased govt spending on infrastructure and RBI action on liquidity


• Manpower projections:
– Will hire (25%), Will lay off (4%)

• Top constraint on growth:

– Liquidity shortage (28%), Negative sentiment and demand recession
(17%), Global recession (10%)

• Growth prospects in 2009:

– Same (13%), Better (17%), Worse (20%)
• Some questions that arise in this current slowdown:

– Does the current global crisis and its adverse impact on India’s trade and
investment outlook provide policy makers with an added motivation for
pursuing structural, institutional, and regulatory reforms?

– Is this a good opportunity to liberalize FDI in sectors that need foreign capital?

– Can the fiscal and monetary stimuli be used to push investment in infrastructure
sectors thereby helping to address:
• immediate macroeconomic concerns of employment and growth
• medium and long run concerns of trade and industry and overall

– Is past fiscal profligacy hurting us from pursuing a more pro-active stimulus
package today?

– Will there be more calls for protectionism in India? Will this slow down our
trade liberalization and other integration efforts?

– What about the rising prospects for protectionism in key markets for Indian