Evolution of International Trade in India

EVOLUTION OF INTERNATIONAL TRADE IN INDIA HISTORICAL BACKGROUND

India’s foreign trade begin to gain importance during late 19 century. There was a significant growth in India’s foreign trade during the period of 1900-1914. As export was flourishing due to which demand of crops like cotton, tea and jute was heavily increasing due to which there was a jump in its production. India was a country producing labour- intensive products but due to World War I Indian foreign trade suffered a lot. But as the war ended there was a sudden increase in demand for raw materials which led to increase in exports. The great depression of 1930 hurt India very adversely as it was doing all over the world. This setback was due to many reasons but most importantly due to: commodity prices had fallen drastically and adoption of discriminatory policy by the colonial government (Bhat, 2011). India achieved a huge of export surplus, during the period of 2nd world war. The partition of country led to a sharp deficit in export of raw cotton and raw jute. On the other hand there was a large demand of products like pig iron as industrialisation was at peak. This shortage of export was maintained by the increase in exports of spices and vegetable oil. In 1938-39, jute manufactures, cotton manufactures and tea accounted for only about 35 per cent increased dependence on a few commodities and brought an element of instability in the export prospects (Mathur, 2006) . Before independence, India’s foreign trade mainly consisted exports of raw material goods and crops, on the other hand import was of consumer goods. Which is very wrong as a suitable condition would be opposite of this and this clearly showed that we were getting exploited by the foreign rule. There were two main tendencies of export in India during the years of 1950-1960: 1) there was no increase in traditional exports of India; 2) there was an increase in exports of iron ore but it was not significant to counter the exports of agricultural products. In these years traditional exports contributed up to 34% to total exports (Bhagwati & Srinivasan, 1975). In 1950 India begin to experience a shortening in balance of payments and also the surplus that India had earned during the Second World War was also being exhausted. Imports were getting higher than the exports which was not a favourable condition. There was a huge shortage in foreign exchange reserves of India which was a major setback for our economy

FOREIGN TRADE IN 2nd and 3rd FIVE YEAR PLANS Certain restriction was placed on the import policy during the year of 1957. These restrictions include limited quotas for essential commodities and discontinuation of open general licenses. The conditions for issue of capital goods license was made hard. Import of consumer goods was discouraged and raw material import was being restricted to the amount necessary for production. As a result imports fall down rapidly which was good. But at what cost? The export policy was being promoted at the time of 1956-60. There was an increase in export of hides and skins, vegetable oil, sewing machines and cotton textiles. Export duties on certain goods was reduced and export quota were liberalized. In the year of 1960-61, due to increase in imports of food grains, metal and raw cotton both govt. and private imports showed significant increase. During this time there was a need to promote exports in respective areas. Due to repayment to IMF and increase in imports goods for development the balance of payment once again begin to crunch. It was seen that exports were not enough to mitigate imports. DEVELOPMENT OF A MULTIFACETED REGIME In post 1970 period, Indian trade was dependent upon complex system of licensing. India’s trade policy heavily relied on quotas rather than on tariffs (Bhagwati & Srinivasan, 1975). There were two condition to import goods. Thus import policy permitted imports only if firms can prove that these were essential for production and at the same time should have to show that there was no domestic production of that import regardless of price and quality. Most of the imports were regularized by the discretionary import licensing and exceptions to that were listed in Open General License category. There was a significant increase in growth rate of exports but it not catch up to the imports. As a result, there was still a crunch in balance of payments. The process of liberalization begin to grow gradually in mid 1980s. Many incentives were given to promote exports. Despite all these measures there was still a continuous pressure on balance of payments. The condition was so bad that foreign reserves were not enough to meet one month’s imports bill.

There was a gradual relaxation in import licensing by the virtue of Export-Import policy of 1977-78. Goods were shifted to OGL which were previously not there. There was0a drastic0increase in0no. Of capital0goods in0the list0OGL which0increased from079 in 1976 to01170 in 1988 (Bhat, 2011). During the01980s, the0import licensing0of capital0goods in0the restricted0list was0administered with0less stringency (Pursell, 1996). As a0result, the0import penetration0ratio in the0capital goods0sector increased0from 11 % to 8% in019985-86 (Golder & ranganathan, 1990). However0only those0intermediate goods0and capital0goods were placed0in the category0of OGL which 0are not produced0domestically. By 1987-88,0the unweighted0average of tariffs 0on manufactured 0goods was 0147 % with most 0tariff lines for0 manufacturing 0clustered around 0a range of 140-160 % (sen, 2009) LIBERALIZATION OF TRADE The LPG (liberalization, privatisation and globalisation) was introduced in 1991. They relaxed restrictive import licensing by the help tariff protection. This policy completely abolished import licensing on most equipment and products used for manufacturing. The main focus of this policy was liberalization of capital good for encouraging domestic industry and to increase growth with the help of exports. India’s financial services are gradually being liberalized (Ahluwalia, 1999). There was additionally a huge change in tax rates with the crest rate diminished from 300 % to 150 %, and the crest obligation on capital merchandise slice to 80 %. Traditions obligation rates tumbled from a normal of 97 % in 1990-91 to 29 % to in 1995-96. There was little or no change in the trade policy with respect to consumer goods which remained on the negative list (Balasubramanyam, 2003). On an average tariff have been reduced from 71% in 1993 to 355 in 1997. In December 1995 around 3000 tariff policies were taken back which were covering raw materials and capital goods. Highest tariff rates were reduced drastically to 40% by the year 2000 from 300% in 1990. Other than these import license continue to be main barrier for imports. Over the years0, the number 0of goods subject to 0import licensing 0have been 0reduced with an emphasis 0on industrial and 0capital goods 0rather than consumer 0products (india, 1993). In 1997, India displayed a system for the evacuation of remaining limitations to its trading partners. The changes in levy and non-duty hindrances have not been joined by comparable changes on fare appropriations and motivating force programs. These incorporate salary charge exclusions, sponsored credit, send out protection and insurances.

The general extent of such motivating forces has been improved, bringing about more unequivocal fare situated approaches, which have expanded the conceivable outcomes of asset misallocation. Then again, since 1996-97, mean duties gradually expanded. The evacuation of quantitative confinements occurred in 2000 and 2001, after India fizzled in its endeavour to guard them on equalization of instalments grounds at the WTO. India has opened up most of sectors for foreign direct investment. In manufacturing foreign companies can participate up to 51 to 74 per cent and with the virtue of changes made in 1993 up to 50% can be invested in mining activities by the foreign investors. And they also provide some tax holidays so that production can be increased in these certain areas. FDI policy has been liberalized. Investment is allowed in greater number of sectors and made eligible for automatic investment procedures (india r. b., 1994). Import weighted means tariffs have slowly increased from 24.6@ in 1996-97 to 30.2 % in 1999-2000 (Bhat, 2011). The government of India played a very dirty game by imposing a high bound tariffs on the agricultural products as to decrease the imports of these goods. Thus flying tariffs to their limits in effect would practically shut of any imports (Srinivasan, 2001). India started taking all measures they can possibly take to safeguard domestic economy. “War room” has been set up to keep a check on imports of over 300 goods which were termed as sensitive. India still remain to be traditional in approaching to exports. Rules and regulations are intact since 2002 regarding exports. To promote exports in relation to increasing imports a number of duty exemption schemes are being provided to exporters. Tax holidays are provide to certain sectors such as farm products, export processing zones, special economic zones, electronics, services and export-oriented units. Recent foreign trade policy passed by India tells us the importance of increase in exports and concentrate on facilitating those imports which are necessary to stimulate the economy. The two main objectives of foreign trade policy of India are: (A) to double the share in global economy in next five year; (B) by generating employment facilities try to be an important part of economic growth. The key strategies assigned to achieve these are: 

Unshackling of controls and making a domain of trust and straightforwardness to

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unleash the capacities of ventures; Neutralizing occurrence of all tolls and obligations on inputs utilized as a part of fare of items;

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Nurturing uncommon centre territories which will create extra vocation

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opportunities, particularly in semi-urban and provincial territories; Simplifying the methodology and cutting down exchange costs; Facilitating innovative and foundation up degree of all parts. Promotion of "Brand India” This new EXIM (export import policy) policy is an integral part for developing international trade. Nevertheless, this kind of policy can be modified from time to time as it would need change due to dynamic economic conditions. With the admission of this policy most of the trade regulations have been lifted. I provides new and liberalized rule for the foreign trade. Principle objectives of EXIM policy: o To facilitate sustained growth of exports and give a 1 per cent share in global market o To stimulate sustained growth by providing access to raw materials and capital goods for production. o To provide and welcome new technology for agriculture, industry and services, so that more employment can be provide and global quality standards can be matched. o To provide quality goods at an internationally lower rates at the same time creating market for domestic good.

WEAKNESS OF INDIA’S FOREIGN TRADE A few studies have shown that financial and trade liberalization had not succeeded in bringing up broad change in commodity composition of India’s foreign trade. This large and diverse industrial sector prevailing in the country is a product of heavy industrialization followed throughout these years. Over time, this sector has accumulated impressive technological capabilities, but these were accompanied by wide-spread technological lags and inefficiencies due to inadequate access to new technologies and capital goods, restricted inward investment, controls on the growth of large private domestic firms (lall, 1999). Be that as it may, the fare area is not adequately enhanced and still commanded by straightforward and undifferentiated items with low levels of expertise and basic innovations, and for which India's near favourable position lies in cheap labour. Due to this specialization India exports mainly those products for which international demand is growing slowly (Srinivasan, 2001). FOREIGN TRADE AND ECONOMIC DEVELOPMENT

Foreign trade is an integral part for the development of a country. This can be shown by these points. 1. Product specialization: due to foreign trade one can achieve specialization in the production of the goods which a country can produce efficiently. This will lead to increase in living standards of life. 2. Quality goods at lower price: due to foreign trade only we can import cheap and quality goods from outside the country. 3. In the absence of foreign trade there would be no flow of technological know-how between two countries and development would be restricted to certain parts of the world. 4. Foreign trade improves both industrial and agricultural sectors of the economy. The inputs which are not easily available in one country can be imported from another country where these are available in abundant quantity. 5. There can’t be a build of local monopolies as there is a fear that consumer would jump to low price imports as soon as any local company tries to exploit them. 6. International trade makes a country efficient in using its resources. A country having export oriented policy tries to use its resources in an optimized manner so that more exports can be done. 7. Foreign trade open the door for foreign investors to invest in where they can get high returns and which have shortage of funds. 8. Foreign trade brings stability in price level. As goods which are in shortage can be imported and goods which are abundant can be exported. This keeps the balance of the economy 9. Foreign trade increase competition which in turn motivates local producers to improve their quality of products or else there products will remain unsold.

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india, G. o. (1993). tax reform committee:final report. new delhi: MINISTRY OF FINANCE. india, r. b. (1994). annual report. new delhi: reserve bak of india. lall, S. (1999). India’s Manufactured Exports: Comparative Structure and Prospects. world development , 27, 10, 1769-1789. Mathur, V. (2006). Foreign Trade of India,1947 to 2007, trenda, policies and prospects. new century publications. Pursell, G. (1996). indian trade policies since 1991-92 reforms. washington D.C.: the world bank. sen, k. (2009). inequality and performance in indian manufacturing . trade policy. routledge, london. Srinivasan, T. (2001). India’s Reforms of External Sector Policies and Future Multilateral Trade. New Haven.: Economic Growth Center, Yale University,.