India's Foreign Trade Transformed Since 1947

India's Foreign Trade Transformed Since 1947

India’s foreign trade underwent a major transformation after independence.

Shifting away from externally controlled patterns, the country began focusing on building its industrial base and reducing reliance on imports.

This marked the beginning of a more self-sustained and nationally driven trade strategy.

• Before independence, the foreign trade of India was operated on the principles of colonialism.

• But after independence, there have been huge changes in its state and direction.

• After independence, inward-looking foreign trade policies were accepted, and the policy of import replacement was its base.

Volume of India's Foreign Trade

• After independence, Indian foreign trade has made cumulative progress both qualitatively and quantitatively.

• Though the size of foreign trade and its value both have increased during the post-independence era, this increase in foreign trade cannot be said to be satisfactory because India's share in the total foreign trade of the world has remained remarkably low.

• In 1950, the Indian share in the total world trade was 1.78%, which came down to 0.6% in 1995.

• According to the Economic Survey 2001-02, this share percentage of 0.6% continued in the years 1997 and 1998.

• According to INDIA 2021, in FY 2019-20, India is the 18th largest exporter (with a share of 1.7%) and, according to INDIA 2020, the 10th largest importer (with a share of 2.6%) of merchandise trade in the world.

India's Balance of Payments

• India's current account deficit (CAD) was 0.2 % of GDP (US$ 1.4 billion) in Q3 of 2019-20, as compared to 2.7 % of GDP (US$ 17.7 billion) in Q3 of 2018-19.

• Gross inflows/gross investments were US$ 69.9 billion in April-February 2019-20, as compared to US$ 56.9 billion in the corresponding period of the previous year.

• There was a net inflow of US$ 16.0 billion of net portfolio investment in April-February 2019-20, as against an outflow of US$ 9.2 billion in the corresponding period of the previous year.

Global Trade Situation

Foreign Trade Policy

• The Foreign Trade Policy (FTP), the basic framework of policy and strategy for promoting trade from India, has conventionally been formulated for five years at a time and reviewed periodically.

• The FTP for 2015-20, announced in April 2015, provided a framework for increasing exports of goods and services as well as the generation of employment and increasing value addition in the country, in keeping with the "Make in India" vision of the country.

• The Foreign Trade Policy lays down a roadmap for India's global trade engagement in the coming years.

• It seeks to enable India to respond to the challenges of the external environment, keeping in step with the rapidly evolving international trading architecture, true, and most importantly, make trade a major contributor to the country's economic growth and development.

• The FTP is aligned with the broader priorities of the Government of India, such as the implementation of 'Goods and Services Tax', 'Digital India', 'Skill India', 'Startup India', 'Ease of Doing Business', and 'Trade Facilitation initiatives'.

• Because of the pandemic, the FTP 2015-20 has been extended by one year, i.e., up to March 31, 2021.   [Source: INDIA 2021]

Special Economic Zones

• India was one of the first countries in Asia to recognise the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

• Seven more zones were set up there after.

• Subsequently, to achieve greater economic activity and employment, the Special Economic Zone Act was enacted with a user-friendly regulatory framework.

• The SEZ Act, 2005, supported by SEZ Rules, came into effect on February 10, 20066.

• All 8 pre-existing Export Processing Zones (EPZ) are located at

  • Kandla and Surat (Gujarat)

  • Santa Cruz (Maharashtra)

  • Cochin - (Kerala)

  • Chennai (Tamil Nadu)

  • Visakhapatnam (Andhra Pradesh)

  • Falta (West Bengal)

  • Noida (Uttar Pradesh)

  • These cities were converted into Special Economic Zones.

  • SEZs being set up under the SEZ Act, 2005, are primarily private investment-driven.

• The total investment in SEZs till June 30, 2020, was 5,81,021 crore, including 5,45,874 crore in the newly notified SEZs set up after the SEZ Act 2005.

• Physical exports from the SEZs have increased from 7,01,179 crore in 2018-19 to 7,96,669 crore in 2019-20, registering a growth of 13.62 %.

• There has been an overall growth of export of 3,388 % over the past 14 years (2005-06 to 2019-20).   

[Source: INDIA 2021]

FDI Limits in different sectors in India

The FDI policy in India has witnessed tons of changes and alterations in the past few years. Further, FDI is also allowed to enter different routes, the Automatic and the Government route.

In the automatic route, the foreign entities are not required to obtain approval before proceeding further. In the Government route, prior approval is mandatory.

Sectorwise FDI Limits (As on 14.11.2020)

Composition of India's Foreign Trade

• Imports have been classified into Bulk imports and Non-bulk imports.

• Bulk imports are further subdivided into Petroleum, Oil and Lubricants (POL) and non-POL items such as consumption goods, fertilizers, and iron and steel.

• Non-bulk items comprise capital goods (which include electrical and non-electrical machinery), pearls, precious and semiprecious stones, and other items.

• The structural changes in imports since 1951 show: 

  • Rapid growth of industrialization necessitates increasing imports of capital goods and raw materials;

  • Growing imports of raw materials based on liberalisation of imports for export promotion, and 

  • Declining imports of food grains and consumer goods due to the country becoming self-sufficient in food grains and other consumer goods through agricultural and industrial growth.

Exports of India are broadly classified into four categories

Agriculture and allied products, which include coffee, tea, oil cakes, tobacco, cashew kernels, spices, sugar, raw cotton, rice, fish and fish preparations, meat and meat preparations, vegetable oils, fruits, vegetable,s and pulses; Ores and minera, ls which include manganese ore, mica, and iron ore;

Manufactured goods which include textiles and readymade garments, jute manufactures, leather and footwear handicrafts including pearls and precious stones, chemicals, engineering goods and iron steel, and Mineral fuels and lubricants.

• Exports of India over the years show a clear decline in the importance of agriculture and allied products and a substantial increase in the importance of manufactured goods.

• This has been due to the changing production structure of the economy and the overall growth of the economy.

External Sector

• India's current account balance turned into a deficit of 0.2% of GDP in the first half (HI) of 2021-22, largely led by a deficit in the trade account.

• Net capital flows were higher at US$ 65.6 billion in HI: 2021-22

• India's external debt rose to US$ 593.1 billion as of end-September 2021, from US$ 556.8 billion a year earlier, reflecting additional SDR allocation by the IMF, coupled with higher commercial borrowings.

• The robust capital flows were sufficient to finance the modest current account deficit, resulting in an overall balance of payments (BoP) surplus of US$ 63.1 billion in HI of 2021-22, that led to an augmented foreign exchange reserves crossing the milestone of US$ 600 billion and touched US$ 633.6 billion as of December 31, 20211.

• As of end-November 2021, India had the fourth-largest forex reserves in the world after China, Japan, and Switzerland. [Source: ES2021-22]

Merchandise Exports

• During 2021-22 (April-December), the merchandise exports recorded growth of 49.7 % to US$ 301.4 billion, compared to the corresponding period of last year and 26.5% over 2019-20 (April-December), exceeding the pre-pandemic levels.

• Out of an ambitious export target of US$ 400 billion set for 2021-22, India has already attained more than 75 % of it by exporting goods worth US$ 301.4 billion, which is higher than the export target of US$ 300 billion set for the April-December period of 2021-22.

• Business services with the largest share in services imports grew by 0.9 % on a y-o-y basis in HI: FY 22.

Current Account Balance

• After witnessing a surplus in HI: FY 21, India's current account balance flipped into a deficit of US$3.1 billion (0.2 % of GDP) in HI: FY 22, on the back of a sharp increase in merchandise trade deficit.

• However, this current account deficit remained lower than the deficit of US$ 22.6 billion recorded in HI: FY 20 (pre-pandemic level).

NET International Investment Position

• India's net IIP stood at (-) 11.3 % of GDP (US$ -332 billion) as at end-September 2021 - a sustained improvement since end-March 201, led by a higher asset-liability ratio, which improved to 73.6 % as at end-September 2021 from end-March 2021.

External Debt

• India's external debt as at end-September 2021, estimated at US$ 593.1 billion, grew by US$ 22.3 billion (3.9 %) over the level as at end-June 2021.

• Excluding the valuation gains due to the appreciation of the US dollar, the increase in external debt would have been US$ 23.7 billion, instead of US$ 22.3 billion.

• Commercial borrowings, the largest component of external debt, at US$ 218.8 billion, recorded a quarter-over-quarter (q-o-q) positive growth of 2.5 % over the level a quarter ago.

• IMF (SDRs) at US$ 23.3 billion rose by as much as US$ 17.6 billion (310.8 %) over the level as at end-June 2021, primarily reflecting additional SDR allocation on August 23, 2021.

• The Sensex and Nifty scaled up to touch their peaks at 61,766 and 18,477 on October 18, 20211. Among major emerging market economies, Indian markets outperformed their peers in April-December 2021.

• The process of insolvency, which was suspended in view of the pandemic, started again in mid-March 2021.

• A pre-packaged insolvency resolution process was provided under IBC as an alternative insolvency resolution process for corporate Micro, Small, and Medium Enterprises in April 2021.

Monetary Developments

• The Monetary Policy Committee (MPC) maintained the status quo on the policy repo rate during April to December 2021 after a substantial cut of 115 basis points (bps) during February-May 2020 and a cumulative 250 basis points cut since February 2019.

• The repo rate, which currently stands at 4 %, is the lowest in the last decade.

Indian Benchmark Indices

• The benchmark stock market indices in India - Sensex and Nifty 50, increased by 17.7% and 18.1 %, respectively, during April-December 2021.

• Driven by good corporate earnings, a sharp rise in COVID-19 vaccination, and the opening up of business establishments across the country, Sensex and Nifty scaled up to touch their peaks at 61,766 and 18,47  respectively, on 18th October 2021.

• The Sensex and Nifty benchmark indices fell after that, but started to rise again and stood at 61,223 and 18,256 respectively as on 14th January, 2022.

Inflation

• The average headline Consumer Price Index-Combined (CPI-C) inflation in India moderated to 5.2 % in 2021-22 (April-December) from 6.6 % in the corresponding period of 2020-21 and was recorded at 5.6 % in December 2021.

• The Consumer Price Index inflation remained range-bound as food prices eased considerably due to the supply management response by the Government.

• Food inflation remained benign during the year at 2.9% (April-December) as against 9.1 % in the corresponding period last year.          [Source:  ES2021-22]

Ease of Doing Business

• The Ministry of Corporate Affairs (MCA) has prescribed a Simplified Proforma for Incorporating Companies (SPICe)

• Along with e-MOA (Electronic Memorandum of Association)

• e-AoA (Electronic Articles of Association), which eliminates the requirement of physically signing the Memorandum of Association (MoA)

• Articles of Association (AOA) by the applicant help entrepreneurs to start a business in India without much hassle.

• The fee for filing the incorporation form has been reduced from Rs. 2,000 to Rs. 500.

• The integrated form INC-29 has been replaced with the SPICe Form.

• Electronic integration of the MCA21 System with the Central Board of Direct Taxes (CBDT) for the issue of PAN and first TAN to an incorporated company using the Simplified Proforma for Incorporating Company Electronically (SPICe) has been undertaken.

• The PAN allotted by the Income Tax Department is being affixed on the Certificate of Incorporation of the Company from February 2017.

• This has resulted in a reduction in the number of processes and time taken for starting a business in the country.

• Rule 15 of the Companies Rules, 2014 (Meetings of the Board and its Powers), was amended in 2017 to reduce the threshold to "10 %" of the networth / turnover as the case may be, against the earlier threshold of exceeding 10,% thereby needing approval of members instead of only board.

• The requirement for obtaining a certificate of commencement of business and the requirement for minimum paid-up share capital for all companies have been done away with under the Companies Act, 2013. [Source: INDIA 2021]

• India has moved 14 places to be 63rd among 190 nations in the World Bank's Ease of Doing Business 2020 report.

• India was 77th among 190 countries in the previous ranking last year, an improvement by 23 places. India put in place four new business reforms during the past year and earned a place among the world's top ten improvers for the third consecutive year.

Nirvik

• Export Credit Guarantee Corporation of India (ECGC) has introduced the 'NIRVIK' scheme to ease the lending process and enhance loan availability for exporters.

• ‘NIRVIK' scheme is called the Export Credit Insurance Scheme (ECIS)

• The insurance cover guaranteed will cover up to 90% of the principal and interest. The insurance cover will include both pre- and post-shipment credit.

• The main aim behind introducing the scheme was to enhance accessibility and affordability of credit for exporters.

Foreign Exchange Reserves in India

• India's Foreign exchange reserves surged to a record high of US$ 550871 mn as on 9th September, 2022.

Indian Rupee (Rs.) Exchange Rate

• Indian Rs. depreciated by 1.4 % (y-o-y basis) vis-a-vis US$ in 2019-20. The Rs. appreciated by 1.9 % against US$ between end-October 2019 and end-March 2020.

Gold Reserves in India

• As of April 1, 2015, India had an estimated 501.83 million tonnes of primary gold ore, with 17.22 million tonnes classified as reserves and 484.61 million tonnes as remaining resources.

• India's primary gold ore is mainly in Bihar (44%), Rajasthan (25%), and Karnataka (21%), with smaller shares in other states.

External Debt

• At end-September 2020, India's external debt was placed at US$ 556.2 billion, recording a decrease of US$ 2.0 billion (0.4 %) over the level as at end-March 2020.

• Excluding the valuation loss, due to the depreciation of the US$ vis-à-vis major currencies, the decrease in external debt would have been US$ 8.3 billion.

• ECBs, the largest component of external debt, at US$ 207 billion as atend-Septemberr 2020, contracted by 5.8% over the level as of March 2020.

• While the stock of NRI deposits, the second largest component, rose 5.1% to US$ 137.3 billion over the level as at end-March 2020

• The (import-financing) trade credit, the third largest component at US$ 99.4 billion, shrank by 2.0 %. Government debt increased to US$ 103.6 billion from US$ 100.9 billion as of the end of March 2020.

Trade Organisations

International Monetary Fund:

International Monetary Fund was established on 27^th December, 1945, on the basis of a decision taken in the Bretton Woods Conference, and it started functioning w.e.f. 1st March, 1947.

• The total member countries of the IMF in 2017 was 188.

• The function of the IMF is to encourage financial and economic co-operation between member countries and to extend world trade.

International Bank for Reconstruction and Development:

IBRD was established in 1945.

• IBRD, along with other institutions, is also called the World Bank. The other institutions are the International Finance Corporation, the International Development Agency, and the Multilateral Investment Guarantee Agency.

• Presently, it is helping member countries in capital investment and encouraging long-term balanced development.

• General Agreement on Tariffs and Trade (GATT) came into being on 30th October, 1947, and started functioning from 1st January, 1948.

• The principle of GATT was an equal tariffs policy, to remove quantitative restrictions and disposal of business disputes in a democratic way.

• On 1^st January 1995, the World Trade Organisation took over the place and position of GATT.

• The headquarters of the WTO is in Geneva, and the number of its member countries in April 2018 was 164. India is a founder member of it.

• The India-ASEAN Trade in Goods Agreement came into effect on January 1, 2010, though it was signed on August 13, 2009.

• The signing of the India-ASEAN Trade in Goods Agreement paved the way for the creation of one of the world's largest Free Trade Areas (FTAs), a market of almost 1.8 billion people with a combined GDP of US$ 2.75 trillion.

Global Index and Reports

Global Peace Index 2022: India at 135th Rank

• 16^th edition of the Global Peace Index (GPI) 2022 was released by the Institute for Economics and Peace (IEP) for 163 countries according to their level of peacefulness.

• GPI is the world's leading measure of global peacefulness.

• Iceland (Rank 1 with score 1.107) remains the most peaceful country in the world, a position it has held since 2008.

• It is joined at the top of the index by New Zealand (Rank 2), Ireland (Rank 3), Denmark (Rank 4), and Austria (Rank 5).

• Afghanistan (Rank 163 with score 3.554) is the least peaceful country in the world for the 5th consecutive year, followed by Yemen (Rank 162), Syria (Rank 161), Russia (160), and South Sudan (Rank 159).

•  India is at 135th rank with a score e 2.578.

NITI Aayog's India Innovation Index 2021

• Karnataka, Manipur, and Chandigarh have topped in their respective categories in the third edition of NITI Aayog's India Innovation Index 2021. The index was released on July 21, 2022.

• Prepared by NITI Aayog and the Institute for Competitiveness, the India Innovation Index is a comprehensive tool for the evaluation and development of the country's innovation ecosystem.

• The number of indicators has increased from 36 (in the India Innovation Index 2020) to 66 (in the India Innovation Index 2021).

• The indicators are now distributed across 16 sub-pillars, which in turn form seven key pillars.

• While Karnataka has topped again in the 'Major States' category, Manipur is leading the 'North East and Hill States' category, and Chandigarh is the top performer in the 'Union Territories and City States' category.y

WEF's Global Gender Gap Index 2022

Global Gender Gap Index Report 2022 was released on July 13, 202,222, by the World Economic Forum in Geneva.

The report assessed countries on four parameters -economic participation and opportunity, educational attainment, health and survival, and political empowerment.

Key findings of GGG Index 2022:

• Iceland retained its place as the world's most gender-equal country, followed by Finland, Norway, New ZealanSwedeneden.

• The WEF warned that the cost of living crisis is expected to hit women hardest globally, with a widening gender gap in the labour force, and it will take another 132 years (compared to 136 in 2021) to close the gender gap.

• COVID-19 has set gender parity back by a generation, and a weak recovery is making it worse globally.

• Out of the 146 economies surveyed, just one in five has managed to close the gender gap by at least 1 % in the past year.

• India has been ranked low at 135th place in terms of gender parity, despite an improvement of five places since last year, on better performance in areas of economic participation and opportunity.

• This is a concern considering India ranked somewhere in the middle, bagging the 87th position worldwide just six years ago, in 2016. India's gender gap has been widening greatly since 2020

• Only 11 countries are ranked below India on the index of 146 nations, with Afghanistan, Pakistan, Congo, Iran, and Chad being the worst five.

World Happiness Report 2022

• The World Happiness Report 2022 has been released by the UN Sustainable Development Solutions Network, and Finland was once again crowned as the world's happiest country.

• India has been ranked 136 out of 146 countries in the list of UN World Happiness Report 2022.

• Top 5 countries - 1. Finland, 2. Demark, 3. Iceland, 4. Switzerland, 5. The Netherlands

• Bottom 5 Countries - 142. Botswana, 143. Rwanda, 144. Zimbabwe, 145. Lebanon, 146. Afghanistan, [Source: WHR 2022]

Global Innovation Index

• India has climbed two spots to 46 in the Global Innovation Index (GII) 2021, prepared by the World Intellectual Property Organization (WIPO).

• The country's rank has been consistently rising in the last few years. From 81 in 2015, it has moved to 46 in 2021.

• India (at 46) moves further ahead, by two spots (48 in GII 2020), after making it into the top 50 last year. It takes second place in the lower middle-income group.

• India held the third position in its income group in 2019 and 2020, having entered the top three in 2019," the GII report said.

• It added that India has been portrayed as successful in developing sophisticated services that are technologically dynamic and can be traded internationally.

• It continues to lead the world in the information and communication technology services exports indicator (1) and holds top ranks in other indicators, such as domestic industry diversification (12) and graduates in science and engineering (12).

• The Centre, in an official statement,,t said that the consistent improvement in the GII ranking is due to the immense knowledge capital, vibrant start-up ecosystem, and the amazing work done by public and private research organisations. [Source: BS, 22 Sept, 2021]

Global Hunger Index 2021

• In the 2020 Global Hunger Index, India ranks 101st out of the 116 countries with sufficient data to calculate 2021 GHI scores. With a score of 27.5, India has a level of hunger that is serious.

• India has the highest prevalence of wasted children under five years in the world, which reflects acute undernutrition, according to the Global Hunger Index 2020.

• The situation has worsened in the 2015-19 period, when the prevalence of child wasting was 17.3%, in comparison to 2010-14, when it was 15.1%.

1st State Ranking Index (2022) for National Food Security Act

• Union Minister of Consumer Affairs, Food & Public Distribution, Textiles, and Commerce and Industry released the 1st edition of 'State Ranking Index (2022) for National Food Security Act' on July 5, 2022.

• The National Food Security Act (NFSA) was enacted on July 5, 2013. To mark the day, a conference of State/UT Food Ministers was held to discuss food and nutritional security, PDS reforms, crop diversification, and storage practices.

• Odisha topped the NFSA State Index, followed by UP and Andhra Pradesh. Tripura led among special category states, and Dadra & Nagar Haveli topped DBT-Cash UTs.

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