Foreign Trade and

Trade Policy

Concepts
Free trade vs Protectionism
Free trade implies having low or no barriers

for the flow of goods and services between

countries.
Protectionism implies putting restrictions to
trade in form of tariff or non-tariff barriers.
Debate
Inter vs Intra-industry trade

Exports: Broad Trends

1950 to Early 70s:
The value of exports as percentage of GDP

fell from 6% to less than 4%.

There were attempts to incentivize exporters
by giving export subsidy but were not
successful due to overvalued currency.
1970s-late 80s:
After the oil shock of 1973 India realized that

there is need to boost export to fund

domestic imports.
Exports grew by 8.8 % and 6.8% in 1970-71
and 1980-81.
Policy changes initiated in 1980s

Exports: Broad Trends

After 1990:
After the BOP crisis extensive policy changes

made in the country.

Exports grew at the rate of 9.2 in 1990-91.
Year
2000-01

Rate of Change (Exports

measured in US$)
21

2005-06

23.4

2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

22.6
29
13.6
-3.5
40.5
25.8

Composition of Exports (source: RBI)

INDIAS EXPORTS(US $ million)

Exports of principal commodities

Share in Total

April - March
April - March
Commodity/
200920102011200920102011Group
2008-09
2012-13 2008-09
2012-13
10R
11R
12P
10R
11R
12P
I. Primary
Products
25,335.4 26,396.5 32,844.2 45,923.6 46,200.0
13.7
14.8
13.1
15.0
15.4
A.
Agricultural &
Allied
Products
17,534.9 17,734.1 24,207.6 37,473.3 40,641.5
9.5
9.9
9.6
12.2
13.5
B. Ores &
Minerals
7,800.5 8,662.5 8,636.6 8,450.3 5,558.5
4.2
4.8
3.4
2.8
1.8
II.
Manufactured 123,148. 115,180. 157,994. 185,422. 183,718.
Goods
9
7
3
6
8
66.5
64.4
62.9
60.6
61.1
A. Leather &
Manufactures 3,556.0 3,361.1 3,910.6 4,793.6 4,870.2
1.9
1.9
1.6
1.6
1.6
B. Chemicals
& Related
Products
22,708.1 22,908.8 28,871.0 37,104.6 39,929.7
12.3
12.8
11.5
12.1
13.3
C.
Engineering
Goods
47,285.6 38,271.3 58,137.9 67,832.2 65,288.6
25.5
21.4
23.1
22.2
21.7
D. Textiles &
Textile
Products
20,016.4 19,853.0 24,225.0 28,026.6 27,343.0
10.8
11.1
9.6
9.2
9.1
E. Gems &
Jewellery
27,955.2 28,996.3 40,476.1 44,840.5 43,457.4
15.1
16.2
16.1
14.7
14.5
F. Handicrafts
301.0
224.8
256.9
277.9
200.2
0.2
0.1
0.1
0.1
0.1
III. Petroleum
Products
27,547.0 28,192.0 41,480.0 56,038.5 60,290.7
14.9
15.8
16.5
18.3
20.1
IV. Others
9,263.7 8,982.2 18,817.7 18,579.2 10,361.1
5.0
5.0
7.5
6.1
3.4
Total Exports 185,295. 178,751. 251,136. 305,963. 300,570.

Composition of Exports
Share of primary products is declining
The share of manufacturing products was 45% in 1950-

51, increased to 71% in 1990-91 and 78.8% in 2000-01.

The share of manufacturing products fell to 64.5% in
2012-13 due to fall in share of traditional items like
textile and leather and leather manufacturing.
Share of petroleum, crude and products increased from
4.3% in 2000-01 to 20% in 2012-12.
Top four items in Indias manufactured exports are:
engineering goods, gems and jewellery, chemical and
related goods and textile.
Shift from labour intensive to capital and skill intensive.

Composition of Exports
India is one of the largest cutting and

polishing centre for diamonds in India.

Of the global polished diamond market,
Indias share is:
70% in terms of value
85% in terms of volume
92% in terms of pieces.

As per Gem and Jewellery Export Promotion

Council (GJEPC) supports about 34 lakh jobs.

Mostly, SMEs employing skilled and semiskilled labour in unorganized sector.

Directions of Exports
Region Wise share of India's Exports
2000200520112012-13

01
06
12
Europe
25.9
24.2
19
18.7
Africa
America

5.3
24.7

6.8
20.7

8.1
16.4

9.6
19.5

Asia

37.4

46.9

50

50.4

Shift in focus from OECD nation to Asian and

American Countries.
After the breakdown of Russia in 1990-91, share of
eastern European nations declined from 17.9% to
2.9% in 2000-01.

Market vs Product differentiation

Shift of focus from developed countries
Growing relevance of developing markets
But in terms of product differentiation India is

not performing as well.

Since in the top 100 imports of the world
India has only 6 items in top 50.
It has only 5 items with share in world import
of 5%.
Diamonds, Articles of jewellery, T shirts and
other vests, cane or beet sugar, petroleum
oils.

Imports: Broad Trends

1950 to Early 70s:
The value of imports as a proportion of GDP

at market price fluctuated from 6-9.8%

through 50s and declined slowly to 6.8% in
1960-61 and 4.2% in 1972-73.
1970s-late 80s:
After 1972-73, increase in imports ratio to over 6% in

rest of the years of 70s and 8-9% in 1980s.

The value of imports increased from 12.5%

in 1997-98 to 13% in 2000-01.

Composition of Imports
INDIAS IMPORTS (US $ million)

April - March
April - March
Commodi
2008- 2009- 2010- 2011- 2012- 2008- 2009- 2010- 2011- 2012ty/Group
09
10R 11R 12P
13
09
10R 11R 12P
13
A.
Petroleum,
Petroleum
Products &
Related
87135 10596 15496 16931
Material
91310.6
.1
4.4
7.5
9.3 30.1 30.2 28.7 31.7 34.5
A. Capital
78546 99223 91449
Goods
71833.1 65865
.1
.3
.7 23.7 22.8 21.2 20.3 18.6
B. Mainly
Export
Related
53608 51904 46863
Items
31930.8 31270
.3
.1
.7 10.5 10.8 14.5 10.6
9.5
65923 86447 12325 12360
C. Others 63502.4
.6
.6
9.1
1.3 20.9 22.9 23.4 25.2 25.1
Total
Imports
303696. 28837 36976 48931 49148
(I+II)
3
2.9
9.1
9.5
7.2 100.0 100.0 100.0 100.0 100.0

Composition of Imports
Increasing share of Petroleum, Oil and

Lubricant (POL)
Increase in imports of gold, silver and other
precious gems.
The imports of capital goods is also on
decline apart from electrical and machine
tools, transport equipments and electrical
machinery.
Decline in share of the electronic goods
(both consumer and capital)

Exports of goods and Imports of goods and

Year services (% of GDP) services (% of GDP) Trade (% of GDP)
1960
4.4
6.7
11.1
1970
3.7
3.8
7.5
1976
6.6
6
12.6
1980
6
9.1
15.1
1990
6.9
8.3
15.2
1991
8.3
8.3
16.7
1992
8.7
9.4
18.1
1993
9.7
9.6
19.3
1995
10.7
11.8
22.5
2000
12.8
13.7
26.4
2001
12.3
13.2
25.5
2002
14
15
29
2003
14.7
15.4
30.1
2004
17.6
19.3
36.9
2005
19.3
22
41.3
2006
21.1
24.2
45.3
2008
23.6
28.7
52.3
2009
20
25.4
45.5
2010
22
26.3
48.3
2011
23.9
30.2
54.1
2012
24
30.7
54.7

Trade in Services
India and China are among the top 10

exporters of commercial services in the

world.
Services include travel, transportation,
insurance, business services, financial
services, software, communication
services.
Software exports are the major service
exports of India to US and European
markets.
The growth rate is reducing in the software
exports in the recent times.

Foreign Trade Policy

Import substitution based strategy
Import intensity of this strategy is also high.
This strategy has significant economic costs

in overall lower growth and low living

standards.
Quantitative restrictions
Grading tariff policy:
Import tariff were highest on least essential

consumer goods
Lower on industrial intermediate inputs.
Least on capital goods

Foreign Trade Policy

Move away from import substitution per se to efficient

import substitution
Considerations of cost and efficiency
Consideration to export promotion

Recommendation of two prominent committee reports:

P.C. Alexandra Committee-simplification of import licensing

procedures, imports of raw material were placed under Open

General License
Abid Hussain Committee emphasized the export promotion
Recommended that trade policy should be constituted for
longer time period leading to five year EXIM policy changed to
FTP in 2009.
Liberalized trade policy became evident in latter half of

80s.
Negative list of exports and imports with quantitative controls

Foreign Trade Policy

Major Changes in 1990
Following the recommendation of Raja J. Chellaih
in 1991 major initiative were taken:
Devalution of rupee
Transition to market based exchange rate
Convertibility at current account
Reduction in import tariffs
Removal of quantitative restrictions
The major change in the trade policy of 1992-97
is a negative list of products banned due to
health, defense and environmental concerns.
Except for consumer goods, all most all items of
capital and intermediate goods can be freely
imported subject to tariffs. The removal of
quantitative restrictions on imports was
accompanied by a gradual lowering of customs

Foreign Trade Policy

The major focus of most of the policies is now to

promote exports.
Most of the strategies are formulated as per needed
by the specific conditions prevailing in domestic
markets as well as in international market.
For Instance Strategy of FTP 2009-14
Zero duty on imports for technology upgardation Export

Promotion
Compliance burden in North East states reduced to 25%
Export benefit for shipment from Delhi vis post
New towns of export excellence
Focus market schemes

Export Promotion Measures

Monetary or non Monetary
Devaluation
Cash assistance
Income tax concession
Import Concessions
Concessional bank credit
Import license to exporters
Convertibility of rupee