Introduction

International trade, according to its proponents, plays a positive role in influencing many economic activities and in turn promotes economic progress of the participating country. India ’s economic policy towards trade and foreign investment in the first four decades after India ’s independence was restrictive. Import substitution constituted a major element of country’s foreign trade and industrial policies. The deficit on current account was met mainly by borrowing and particularly from official sources. However, the early 1990s saw a metamorphic change in perception towards the external sector and its role in overall development, which resulted in radical liberalisation of foreign trade policies: the approach to and content of policy underwent a change which was reflected in outward orientation of the trade policy replacing an “inward looking” strategy. Since then the share of exports in total GDP has risen from 5.8 per cent in 1991 to 12.6 per cent in 2005-06. The ratio of incremental exports to incremental GDP has also risen in recent years, after having stagnated during the second half of 1990’s. This is indicative of the fact that contribution of exports to economic growth and activity has risen in the recent past implying that the importance of exports as a growth enhancing activity has increased over a period

A Brief Review of India ’s Trade Policy

India ’s foreign trade policy during the last five decades may be broadly split into import substitution policy, export drive policy and export acceleration policy. The import substitution was followed in the first two decades. With fears of external dominance, the Indian planners adopted a somewhat introvert external trade strategy which relied on encouraging domestic production for the domestic market with the help of high tariffs and high degree of protection. Far from viewing foreign trade as an engine of growth, Indian planners sought to minimise import demand by adopting an import substitution policy and gave secondary place to exports primarily as a source to generate the foreign exchange earnings to meet that part of the import bill not covered by external assistance. There were controls over both imports and exports. However, this policy of import substituting industrilisation and system of controls failed to produce rapid growth and self-reliance.

With the realisation of the drawbacks of the excessively inward-looking strategy on one hand and the need for modernisation and technology upgradation on the other, certain policy measures were initiated in the late seventies. Export incentives in the form of cash compensatory support (CCS), import replenishment (REP), duty drawback (DDS), market development assistance (MDA) etc and export services in the form of export promotion councils, commodity boards and specialised services institution were introduced. The strategy towards a greater integration of the Indian economy with the rest of the world has been pursued since then. In 1975-76 import policy was liberalised to make available imported inputs for registered exporters. In mid-1980s the government adopted a three-year import-export policy (1985-88) with the aim to provide easy access to imports, essential for maximizing production and exports. The main policy changes were abolition of automatic licensing, inclusion of 201 items of industrial machinery under capital goods import under OGL, decentralisation of 53 import items and granting facility for import of capital goods against REP license from Rs 1 lakhs to Rs 2 lakhs.

The second three-year policy (1988-91) carried forward the process of trade liberalisation to make exports more competitive. The policy was designed to stimulate industrial growth by providing easy access to essential imported capital goods, raw materials and components to industry so as to sustain movements towards modernization, technological upgradation and making Indian industry competitive internationally. The liberal imports of capital goods and technology were viewed as a means to enable exporters to undertake technological upgradation in order to compete more effectively in the international market.

In the 1990s many short run adjustments were made in the trade policy in order to overcome the external sector crisis, which hit the country in 1991. Two major measures taken in trade policies were (a) liberalisation of imports entailing successive expansion in the OGL list and (b) linking expansion in exports to import liberalisation. CCS scheme was suspended, REP license was substituted by EXIM scrips. The rupee was devalued in July 1991 and the country saw transition towards the market-based exchange rate regime. In order to further boost exports, the Indian rupee was made fully convertible against current account in 1993. In August 1994, the final step towards current account convertibility was taken by acceptance of the obligations under Article VIII of the IMF requiring commitment from India to use exchange restrictions on current international transactions as an instrument to manage balance of payments. The five-year EXIM policy for 1992-97 was announced in March 1992 with a view to stimulate exports and facilitate imports of essential inputs as well as capital goods. The policy was also aimed at phasing out quantitative restrictions in the form of licensing and other discretionary controls. The export-import policy for 1997-2000 was aimed at achieving one per cent share in world trade.

A new policy was introduced in the Exim Policy effective from 1.4.2000 for setting up of Special Economic Zones in different parts of the country with a view to provide an internationally competitive and hassle free environment where export production ccould take place free from plethora of rules and regulations governing import and exports. A lot of incentives in the form of duty free import of capital goods and raw material were provided. In early 2002, the Government presented a Medium Term Export Strategy (MTES) for 2002-07 with sector-wise targets, with the aim to achieve 1 per cent of global trade by 2007.

In August 2004, the government announced a new Foreign Trade Policy (FTP) for the period 2004-09 thus replacing the hitherto nomenclature of EXIM policy by FTP. A vigorous export-led growth strategy of doubling India’s share in global merchandise trade in the next five years, with a focus on the sectors having prospects for export expansion and potential for employment generation, constitute the main plank of the Policy.

It should be noted that the policy changes have been influenced by the recommendations of a number of Committee, which were set up during the ‘seventies’ and ‘eighties’. In this context two prominent committee reports namely the Report of the Committee on Import Export Policies and Procedures (Chairman: P.C. Alexander, 1978) and the Report of the Committee on Trade Policies (Chairman: Abid Hussain, 1984) need to be mentioned. The Alexander committee recommended simplification of the import licensing procedure and provided a framework involving a shift in the emphasis from ‘controls’ to ‘development’. Following the recommendations of this report, selective import liberalisation measures were initiated primarily aiming at making the import of capital goods easier. Imports of certain raw material that were not available indigenously were also placed under OGL list.

The Abid Hussain Committee envisaged “growth-led exports” and stressed upon the need for harmonization of foreign trade policy with other economic policies arguing for a phased reduction of effective protection. The Committee also favoured announcement of trade policies for longer periods in order to impart a degree of continuity and facilitating long-term planning of export business. In line with these recommendations, long-term trade policy was introduced with the announcement of an import export policy covering the period 1985-88. Following the announcement of two more such three-year Import Export policies, these policies are being announced with the longer period with the EXIM policy for 1992-97.

Over the years, significant reforms have helped to strengthen the export production base, remove procedural irritants, facilitate input availability besides focusing on quality and technological upgradation and improving competitiveness. Along with various reforms under Trade Policy, steps have also been taken to promote exports through multilateral and bilateral initiatives, the important ones being SAARC and ASEAN, which are briefly discussed below.

South Asian Association for Regional Cooperation (S.A.A.R.C.)

South Asian Association for Regional Cooperation (SAARC) consists of seven countries, namely, Bangladesh , Bhutan , India , Maldives , Nepal , Pakistan and Sri Lanka . In recognition of the geographical proximity, cultural and religious affinity and economic synergies which could be used to mutual benefits, these seven countries of South Asia, organised themselves and established an association called the ‘South Asian Association for Regional Cooperation’ (SAARC) at the first SAARC Summit on December, 1985. The main aim of SAARC is to promote the welfare of the people of South Asia; accelerate economic growth and social progress: promote active collaboration in the economic growth and social progress; promote active collaboration in the economic, social, cultural, technical and scientific fields; strengthen cooperation in international forums on matters of common interest; and cooperate with international and regional organizations with similar aims and purposes

India has cooperated actively in SAARC activities and vigorously promoted trade and other forms of economic, social and technical cooperation within SAARC India also actively supports people-to-people initiatives aimed at fostering greater mutual understanding and goodwill in the region

Table: India 's Bilateral Exports with SAARC Countries
(Rs Crore)
	2001-02	2002-03	2003-04		2004-05	2004-05	2005-06
Country						(Ap-Nov)	(Ap-Nov)
Bangladesh	4779.6	5297.2	7999		7126.9	4375.6	4048.6
Sri Lanka	3008.9	4456.6	6061.9		6082.6	4053	5543.2
Nepal	1022.8	1438.4	3075.8		3273.1	2347.3	2329.7
Pakistan	686.8	996	1318.5		2271	1431.5	1505.2
Bhutan	36.2	189	411.2		377.6	263.9	264.4
Maldives	128.2	152.9	194.6		191	131.1	172.9
Total	9662.5	12530.1	19061	19322.2		12602.4	13864
Source: Ministry of Commerce, Annual Report 2005-06

It has been observed that among the seven SAARC nations, Sri Lanka has been the major export market for India almost comprising 40 per cent of India ’s total exports to SAARC countries in 2005-06, followed by Bangladesh (28 per cent) and Nepal (16 per cent). The total exports of India to SAARC region increased by 8.7 per cent during April-November 2005-06 over the corresponding period in the previous year.  India ’s bilateral trade relations with these countries are briefly indicated below:

Bangladesh

The bilateral trade is carried out within the framework of India-Bangladesh Trade Agreement, with Most Favoured Nation (MFN) treatment accorded to each other.  India ’s major items of export to Bangladesh are wheat, rice, other cereals, pulses, diary products, oil meals, cotton yarn, fabrics, petroleum crude and products, plastic and linoleum products, machinery and instruments and primary and semi-finished iron and steel, transport equipments, processed minerals and manmade yarn.

Bhutan

Under the Agreement on trade and commerce between India and Bhutan (which expired on March 1, 2005 and has been extended), India provides transit facilities through Indian territory for Bhutan ’s trade with third countries.  India’s major exports to Bhutan have been manufactures of Metals, machinery and instruments, transport equipments, electronic goods, rice (other than basmati) and processed items etc. 

Nepal

            Indo-Nepal bilateral trade is governed by the bilateral treaties, namely Treaty of Trade, Treaty of Transit, and Agreement for Cooperation to Control authorized Trade.    India ’s major export items to Nepal have been drugs and pharmaceuticals, fine chemicals, petroleum products, pulses, rice (other than Basmati), tobacco, cotton yarn fabrics etc.    

Pakistan

            India and Pakistan have no formal trade agreement.  India has granted Most Favoured Nation (MFN) Status to Pakistan since 1996 but Pakistan is yet to reciprocate .  India ’s exports to Pakistan are restricted to the list of items in the Positive List as notified by the Government of Pakistan from time to time. This list constitutes 773 items.  Both countries have set up a Joint Study Group (JSG) at the level of Commerce Secretaries for adopting a strategy to boost trade and economic cooperation. The major items of exports to Pakistan have been rice (other than Basmati), spices, oil meals, iron ore, drugs, pharmaceuticals and fine chemicals and rubber manufactured products except footwear.   

Sri Lanka

Sri Lanka has traditionally been an important export market for India , and is the second largest importer of Indian goods in the region after Bangladesh .  The bilateral trade is carried out under Indo-Sri Lanka Free Trade Agreement (ISFTA), which was signed on 28^th December, 1998.  The important items of export have been pulses, wheat, other cereals, spices, oil meals, fresh vegetables, drugs, glass and many others.

Maldives

            Indo-Maldivian trade relations are governed by the Trade Agreement signed in 1981. India ’s important items of export to Maldives have bee rice (other than basmati), sugar, fresh vegetables, miscellaneous processed items, drugs, pharmaceuticals and fine chemicals.

            A regional trade block among these members was formed when SAARC Preferential Trading Arrangement (SAPTA) was signed in April, 1993 for giving preferential market access to the exports of the member countries in a limited way. Four rounds of negotiations have been completed and no further round is now contemplated following the signing of Agreement on SAFTA. The Agreement on South Asia Free Trade Area (SAFTA) was signed during the 12th SAARC Summit held in Islamabad on 4-6th January, 2004. The Agreement provides for free trade in goods among SAARC member countries.       

 

India & Association of South East Asian Nations (ASEAN) 

            ASEAN is an effort to establish cooperation in the economic, social, cultural, technical, educational and other fields among its member countries, namely, Indonesia , Malaysia , Philippines , Singapore , Thailand , Brunei Darussalam, Vietnam , Laos , Myanmar and Cambodia . India became a dialogue partner of ASEAN in 1992 in the sectors like trade, investment, tourism and science and technology. Further, ASEAN invited India to become a full dialogue partner of ASEAN during the fifth ASEAN summit in Bangkok in 1995 and a member of the ASEAN Regional Forum (ARF) in 1996 led by mutual interest of both. Growth in India 's exports to ASEAN in recent years has been much higher in comparison to other destinations. India 's trade with the world in 2003 stood at $114.13 billion, ASEAN accounting for 8.56 percent of India 's global trade. In 2004-05, India ’s exports to the ASEAN region has gown by a robust 37 per cent over the previous year, imports witnessed a growth of 18.5 per cent in the same period.  The major destinations for India ’s exports in the region are Singapore , Indonesia , Malaysia , Thailand , and Vietnam .

 Bilateral trade of major ASEAN countries with India

Indonesia

            Indonesia is India 's third largest trading partner in ASEAN. For a number of years, Indian state-owned trading companies, STC and MMTC have been active traders in Indonesia , doing business in commodities such as tin and crude palm oil, and a host of agricultural products such as oil meals, groundnut and agro-chemicals. Over the last decade, however, the trade basket has been diversified to include steel, machinery and especially exports of pharmaceuticals from India currently pegged at around $3-4 million a year.

Singapore

            India has become Singapore 's fastest-growing trade partner overtaking China . India is Singapore 's 12th-largest trading partner and also the 12th-biggest market for Singapore-made goods. Singapore 's cumulative investments in India , was around $1.3 billion till the end of 2003. Such investments have grown by an astounding 60 per cent annually for the last 10 years. In comparison, India 's investment in Singapore has grown by 14 per cent over the past decade. More than 300 Indian IT companies have set up software development operations in Singapore . There are about 1500 Indian companies currently based in Singapore and every year around 150 new companies set up base. Indian firms now make up the fourth largest community in Singapore .

Thailand

            India and Thailand have signed a free trade agreement in August 2006 to unleash trade potential between the two countries. Indian companies in the gems and jewellery sector have already established a reputation in Thailand and about 57 per cent of India 's exports to Thailand (in value terms) originate from this sector. A joint feasibility study conducted by the two countries has concluded that the Free Trade Agreement (FTA) would result in significant trade creation; India 's exports to Thailand could increase by 42.71 per cent, while Thai exports to India would rise by 113.71 per cent in 2006-07.

Malaysia

            Malaysia is among the top ten international investors in India . Up to 2003, investments spread over diverse industries ranging from aqua-culture to rubber businesses to telecom equipment were pegged at around $450 million. And in the infrastructure sector, Malaysian companies have already completed 21 projects worth $830 million.

Myanmar

            Myanmar , which joined ASEAN in 1997, is India 's gateway to South East Asia . India 's northeastern states share their borders with Myanmar . Although roads connecting India and South East Asia have been lying disused for decades, it offers lot of prospects. Though most of the India-Myanmar trade has been restricted to merchandise, there's considerable scope for India 's manufacturing and energy sectors to step up investments in Myanmar .

Vietnam

            The value of Indian exports to Vietnam stood at $457 million and from Vietnam to India stood at $30 million in 2003. At the moment, India has investments in Vietnam 's sugar and pharmaceuticals business. India is currently leveraging it’s IT and energy sectors advantage for investments in Vietnam . For instance, ONGC has put in $200 million in an upstream gas project in southern Vietnam . The increasing trade between India and ASEAN has represented the deepening ties between the two.

Other policy Initiative

Setting up of special export zones, taking inspiration from Chinese success, formed a vital policy initiative of the EXIM/Trade policy.

Special Economic Zones

Special Economic Zones (SEZ) are growth engines that can boost manufacturing, augment exports and generate employment. A policy had been introduced on April 1, 2000 for setting up of Special Economic Zones (SEZs) in the country with a view to provide an internationally competitive and hassle free environment for exports. Units may be set up in a SEZ for manufacturing goods and rendering services. These units in the Zone have to be a net foreign exchange earner but they shall not be subjected to any pre-determined value addition or minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ units shall be subject to payment of full custom duty and import policy in force. Further offshore banking units may be set up in the SEZs.

The policy provided for setting up of SEZ's by private sector or by State governments in association with private sector. Private sector had been invited to develop infrastructure facilities also. It had also been envisaged that some of the existing Export Processing Zones (EPZs) would be converted into SEZ's. Accordingly, the Government has converted EPZ located at Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Mumbai-Maharashtra), Falta (West Bengal), Madras (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh) into SEZ's.

SEZs in India have hitherto been functioning under the provisions of the Foreign Trade Policy and are eligible for fiscal incentives as provided under the relevant statutes. In order to instil confidence in investors and signal the government’s commitment to a stable SEZ policy regime, a comprehensive Special Economic Zones Act, 2005, has been passed. This Act has come into force with effect from February 10^th, 2006, with SEZ Rules having been legally vetted, approved and ready for notification.

The significant features of the Rules thus announced are:

·           Simplification of procedures for development, operation, and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs;

·          Single window clearance for setting up of an SEZ; and also for a unit in SEZ

·           Simplified compliance procedures and documentation with an emphasis on self certification; and

·           That a wide range of services can be rendered from SEZs.

Minimum area requirements stipulated for various categories of SEZs have also been specified in the Rules

With the Act and Rules in place, it is expected that many large, multi-product SEZs that have so far been unable to achieve financial closure will now quickly move towards such closure. It is anticipated that this will trigger a large flow of foreign and domestic investment in SEZs and in infrastructure and would create employment opportunities.

Investment of the order of Rs.100000 crore over the next 3 years with an employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of the SEZs. Heavy investments are expected in sectors like IT, pharma, biotechnology, textiles, petro-chemicals, auto-components etc.

 

SEZ Exports

Table 2: Exports from Special Economic Zones
(Rs Crore)
SEZ	2003-04	2004-05
Kandla	1018.82	1060.14
SEEPZ	7832.81	8298.59
Noida	1534.17	4266.00
Madras	1037.96	1376.91
Cochin	298.91	462.99
Falta	825.34	569.15
Visakhapatnam	435.67	579.27
Surat	869.90	1539.72
Manikanchan	NO	95.54
Jaipur	NO	5.27
Indore	NO	55.02
Total	13853.58	18309.00
NO: Not operational
Source: Ministry of Commerce (www.commerce.nic.in)

Exports from the Special Economic Zones during 2004-05 have been of the order of US$ 4 billion, representing an annual growth of over 36 per cent. During April-December, 2005, the exports from the SEZs stood at about US$ 3.5 billion. At present, 948 units are in operation in the SEZs, providing employment to more than 1 lakh people.

So far, approvals have been given for setting up of 117 Special Economic Zones (including 3 Free Trade Warehousing Zones) spread over 15 states and 2 union territories, of which 7 new SEZs have become functional. The other SEZs are at various stages of implementation.

 

Agri Export Zones

With a view to promoting agricultural exports from the country and remunerative returns to the farming community in a sustained manner, the concept of the agri export zones (AEZ) was floated in the Exim Policy 2001. These zones have been set up for end-to-end development for export of specific products from a geographically contiguous area.

Keeping pace with the fast changing international trade environment, these zones take a comprehensive look at a specific produce/product located in contiguous area for developing and sourcing the raw materials, their processing/packaging, leading to the final export. By identifying the potential products and the geographical region in which they are grown, these zones adopt end-to-end approach of integrating the complete process right from the stage of production till it reaches the market. Adding value to basic agricultural produce by improving the product quality and packaging is another area that comes in the purview of these zones. Hub of activities, these zones are expected to take India to the forefront of global market.

AEZ are to be identified by the State Government, who would evolve a comprehensive package of services provided by all State Government agencies, State agriculture universities and all institutions and agencies of the Union Government for intensive delivery in these zones. Corporate sector with proven credentials would be encouraged to sponsor new agri export zone or take over already notified agri export zone or part of such zones for boosting agri exports from the zones.

Services which would be managed and co-ordinated by State Government/corporate sector and would include provision of pre/post harvest treatment and operations, plant protection, processing, packaging, storage and related research & development etc. APEDA will supplement, within its schemes and provisions, efforts of State Governments for facilitating such exports

Export Oriented Units

The Export Oriented Units (EOUs) scheme introduced in early 1981, is complementary to the SEZ scheme. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. As on 31^st December 2005, 1942 units are in operation under the EOU scheme. Exports from EOUs during 2004-05 were of the order of Rs 36806.17 crore as comoared to export of Rs 28827.58 crores achieved during 2003-04, registering a growth of 27.7 per cent.

Trends in India ’s Export

As mentioned above, the year 1991 was marked with external sector crisis. Among other problems of crisis dimensions faced by the country during that year, India was left with foreign reserves barely enough to cover a weeks imports. To tide over the problem, among other measures trade reforms were introduced. The focus of these reforms was on liberalisation, openness, and transparency and the thrust was shifted from import substitution to export promotion. Responding to the policy measures, India ’s foreign trade began exhibiting considerable buoyancy during the period 1993-94 to 1995-96. However, the growth in foreign trade decelerated for the next three years that is from 1996-97 to 1998-99. Structural constraints operating on demand as well as supply side of our exports contributed to a slowdown or decline in exports during the same period. The recessionary conditions due to east-Asian crisis in July 1997, which spread across other emerging market economies, resulted in unfavourable international trading. A reduction in global demand due to recessionary tendencies led to a substantial reduction in world trade and in turn a contraction in our exports (as well as imports). After a healthy export growth of 20.8 per cent in 1995-96, the rate of growth came down to 5.3 per cent, 4.6 per cent and -5.1 per cent in the next three years until 1998-99. An economic contraction in East Asian economies resulted in a decline in their import demand. Since Asia accounts for one-fifth of India ’s total exports, our country could not escape the downward impact on exports of a low demand from these countries. Imports also witnessed a downturn during 1996-97 to 1998-99 although on a relatively lower scale.

India ’s foreign trade looked up in the next two years only to face another downturn in 2001-02, arising out of a deceleration in the global economic activity. The year 2001-02 was marked by an economic slowdown in major industrial countries and also in east Asia. World trade prices also declined for both fuel and non-fuel commodities. These recessionary conditions combined with the adverse impact of September 11, 2001 attack created unfavourable conditions for world trade in general. Its impact was also observed on Indian merchandise trade performance , with exports registering a decline of 0.6 per cent.

Since 2002-03, India ’s export have been witnessing a robust growth and exhibiting a tendency of moving on to a higher growth trajectory. After a dismal performance in 2001-02, as mentioned above exports witnessed a sharp recovery in 2002-03 and the trend of strengthened growth has been maintained till 2005-06. In fact, during the fiscal year 2005-06, exports have surpassed the revised annual target of $92 billion (from an earlier target of $88 billion) to cross the psychologically magical mark of $100 billion indicating a robust growth of 23 per cent (in US dollar terms). This growth has been commendable as it comes on top of an equally high growth of 30 per cent achieved during 2004-05 (Appendix Table A).

Both external and domestic factors have contributed to the satisfactory performance of exports since 2002-03. Improved global growth and recovery in world trade have aided the strengthening of Indian exports. On the other hand, firming up of domestic economic activity, especially in the manufacturing sector, provided a strong base for sector-specific exports. India ’s export performance during 2004-05 and 2005-06 was also influenced by continued trade promotion and trade facilitation efforts of the government.

 

Table 3: Various Ratios
Year	Exports in	Imports in	GDP at current	Export to		Import to		Total of		Trade to
	Rs Crore	Rs Crore	market prices	GDP ratio		GDP ratio		Import and		GDP ratio
			in Rs Crore					exports
2005-06	445658	620826	3531451	12.6		17.6		1066484		30.2
2004-05	361879	478302	3121414	11.6		15.3		840181		26.9
2003-04	293367	359108	2760224	10.6		13.0		652474		23.6
2002-03	255137	297206	2449736	10.4		12.1		552343		22.5
2001-02	209018	245201	2281305	9.2		10.7		454219		19.9
2000-01	201357	228307	2107661	9.6		10.8		429663		20.4
1999-00*	159095	215529	1958814	8.1		11.0		374624		19.1
1998-99	139752	178332	1740985	8.0		10.2		318084		18.3
1997-98	130100	154176	1522547	8.5		10.1		284276		18.7
1996-97	118817	138920	1368208	8.7		10.2		257737		18.8
1995-96	106353	122678	1188012	9.0		10.3		229032		19.3
1994-95	82673	89971	1012770	8.2		8.9		172644		17.0
1993-94	69749	73101	859220	8.1		8.5		142850		16.6
1992-93	53688	63375	748367	7.2		8.5		117063		15.6
*: based on new 1999-00 series			For 2005-06 Export and Import data are provisional and GDP data
are revised estimates
Source: Export-Import data from DGCI&S and GDP data from CSO, 2005

The ratio of exports to GDP has increased from 7.2 per cent in 1992-93 to 12.6 per cent in 2005-06 and (that of imports to GDP has galloped from 8.5 per cent to 17.2 per cent). During the decade of the 1990 (excluding the year 1990-91), the ratio of exports to GDP was at an average of 8.2 per cent, which has increased to 10.2 per cent in just five years of the new millennium. India ’s total merchandise trade, which is an indicator of the degree of openness of the economy, has increased substantially from 15.6 per cent of GDP in 1992-93 to 19.1 per cent in 1999-00 and further to 30 per cent of GDP in 2005-06 (Table 3).

Changes in the Commodity-wise Composition of Exports

Over the years the commodity composition of India ’s export basket has changed in favour of technology intensive and industrial products such as, engineering goods, besides high-value agricultural products. India has gradually transformed from a predominantly primary products exporting country into an exporter of manufactured goods. Aided by various export promotion measures, the share of ‘manufactured goods’ in India’s total exports peaked in 1999-00 to 80.9 per cent (its share has otherwise hovered between 70 per cent and 77.9 per cent). Among manufactured products, gems and jewellery, chemicals and related products and engineering goods are the major items, which have contributed to the overall rise in share. Over the years, the share of gems and jewellery in total exports has remained somewhat stable but its growth has fluctuated. In 2004-05,the gems and jewellery segment recorded its highest growth of 30.2 per cent almost same as achieved in 1993-94 (30.1 per cent). However, in 2005-06 the growth has moderated to just 13 per cent mainly due to weakening demand from the major markets resulting from high gold prices Exports of gold jewellery form a major part of India’s total export under gems and jewellery segment. Not only the shares of chemicals and related products and engineering goods have gone up but also they have been major contributors to the export growth in recent years. A rise in exports of engineering goods highlights the strength of the manufacturing sector.

The share of agriculture and allied products has displayed a declining trend. From a peak of 13.7 per cent in 1996-97, it has come down to 7.6 per cent in 2004-05. However, exports of processed agricultural products has shown a marked improvement in recent years.

The share of traditional export items such as tea, coffee, handicrafts and carpet has declined. In recent years, India has been facing stiff competition from Pakistan , Bangladesh and Sri Lanka in the market for carpets. Share of textile exports, which has been India ’s forte, has also witnessed a steady decline from a high of 25.1 per cent in 1998-99 to 15.5 per cent in 2004-05 and further to 14.8 per cent in 2005-06. However, the growth in textile exports has accelerated in 2005-06, probably mainly due to dismantling of quota regime.(Appendix Table A).

Exports of petroleum products have also increased in the recent years. The share of petroleum products has gone up remarkably from a miniscule 0.1 per cent in 1999-00 to 8.6 per cent in 2004-05. Export earnings from petroleum products has also witnessed a healthy growth due to high international oil prices as deterred by the low earnings in domestic sales (from past 2 years), oil companies have been exporting instead of selling their products in domestic market.

Ores and minerals is another commodity group whose share in total exports has also risen, over the years.

Destination-wise, US has continued to be the principal export destination accounting for 16.7 per cent of India’s total exports in 2005-06, followed by UAE (8.4 per cent), China (6.5 per cent), Singapore (5.4 per cent) and UK (5.0 per cent). Over the years there has been a shift in destination-wise exports with the share of major trading partners like USA , Japan , UK declining. This decline is very discernable as far as Japan is concerned; its share in India ’s total exports has come down from 7.8 per cent in 1993-94 to 2.4 per cent in 2005-06. On the other hand, UAE and China have emerged as one of the major trading partner. Even Singapore has become a major destination of India ’s exports (Appendix Table B).

Hence, a strategy focusing on industries having export potential in the international market is the requirement of the day. This entails identification of industries which should form part of India ’s strategy for raising exports.

Thrust Areas and Policies to Boost Exports Further

Exports of merchandise from India have grown several-fold in the last few years managing to cross the $100-billion mark during 2005-06. However, a closer look at India ’s export basket and major markets shows that not much diversification has taken place in either over the years. Our export basket mainly comprises gems and jewellery, petroleum and related products, ready made garments, machinery and instruments, pharmaceuticals, chemicals, cotton yarn, transport equipment, iron ore & primary and semi-finished iron & steel and electronic goods. Our markets, too, have remained more or less same over the years. True, that China is emerging as our major bilateral partner, the top markets for India including the US , China , the UAE and the EU remain much the same.

Table 4: Share in World Exports of Select Countries
Country	2004	2003	2001	1990
China	6.6	5.9	4.3	1.8
Malaysia	1.4	1.3	1.4	0.8
Indonesia	0.8	0.9	0.9	0.7
Singapore	2.0	1.9	2	1.5
Thailand	1.1	1.1	1.1	0.7
India	0.8	0.8	0.7	0.5
Korea	2.8	2.6	2.5	1.9
Source: Economic Survey, 2005-06

Also, India ’s export share in world trade has increased perceptibly during the recent period. This share was at about 2.0 per cent in 1950-51 but had steadily declined to 0.52 per cent by the early 1990s. Since then there has been an increase. It has thus moved up to around 0.84 per cent during 2004 from 0.52 per cent in 1990. Nonetheless India ’s share in world exports is still very low and looks very unimpressive when compared with other major trading Asian countries, such as, China and other East Asian economies like Malaysia , Thailand , Singapore , Korea and Indonesia (Table 4).

 

Textile and Garments

Although the textiles and clothing industry accounts for a substantial proportion of India's exports (average of around 21 per cent in last 5 years) and has a nearly 4 per cent share of the world market, there are reasons to believe that the sector has the potential for a major boom in the next five years. These factors include the phase out of MFA quotas, impending restraints on current dominant player in the market, viz. China . However, this industry is faced with challenges of

·        Consolidation and modernisation of its fragmented production structure.

·        Infrastructure bottlenecks.

·        Trade barriers, both tariff and non-tariff, in the major markets of US and EU.

·        Emphasising on value-added exports like garments rather than fabrics and high-fashion garments.

·        Focusing on highly traded value added segments within garments, such as suits and jerseys where India ’s presence is lower.

Leather Goods

Leather is another important area which has huge export potential a fact also highlighted by a study by EXIM bank. Leather industry is the oldest and traditional industry in the country r although its importance in India's total exports has declined over time from 8 per cent in 1980s to around 3 per cent in the recent years also India’s share in the world leather exports is low, despite the fact that it is one of the topmost livestock holding country. This sector has seen a transformation from being exporter of mainly raw materials to value added goods such as leather garments, gloves, etc. India 's overall share in world leather goods is about 2.6 per cent but the country commands a sizeable share in certain value-added items such as leather garments. Like textiles they also face major policy challenges including

·        Consolidation and modernisation of production structure.

• Dealing with trade barriers in developed countries in particular the environmental standards.
• Moving up the value chain in high fashion garments and shoes; setting up design centers around the clusters of leather industry.
• Developing a quality culture and promoting brands.

Gems and Jewellery

The gems and jewellery sector has emerged as one of India 's most important contributors to export earnings and also employment. In 2005-06, India exported gems and jewellery worth US$ 15 billion, accounting for nearly 15 per cent of India 's total exports. In the segment of cut and polished diamonds, India commands a dominant position in the world with a 80-85 per cent market share although this share is lower at 55-60 per cent in terms of value, suggesting that Indian exports are concentrated in relatively lower value segments. Also, its share in the world jewellery segment is low at around 4 per cent. This industry requires relatively lower infrastructure facilities compared to other industries. Major policy challenges for the industry are

• Moving up the value chain in the cut and polished diamonds segment and improving our share in high value segment. There is a strong need to build a strong "Made in India " brand, which is acceptable worldwide.

• India needs to leverage its dominance in the gems industry to strengthen its position in the jewellery segment. While retaining the traditional strengths in custom made jewellery, capabilities in machine made jewellery should be expanded.

·        Need for strengthening the design capability where India lags behind Italy , Hong Kong and Germany .

Agricultural Commodities and Processed Foods: Large Export and Employment Potential

Most of the exports under agricultural exports are of conventional farm products like rice, wheat, tea coffee, marine products, etc. however, most of these products face constraints in the form of very strong domestic demand and inadequate infrastructure facilities which inhibit exports. Hence, major improvement in productivity and removal of infrastructure bottlenecks is essential to realise higher exports from this sector.

Despite significant growth in exports since 1991-92, India 's share in the international food trade is quite negligible at around 1.5 per cent. India 's share of world exports is also insignificant in most broad segments. India must develop proper post harvest management practices and building processing facilities in order to increase its global market share. Various areas with large employment and export potential where India must focus are given below in brief.

Horticulture Exports

India has a wide variety of climate and soils on which a diverse and large number of horticultural crops could be grown. These include fruits, vegetables, potato, tropical tuber crops, mushrooms, ornamental, medicinal and herbal plants, plantation crops, spices, cashew, cocoa, etc. It is becoming increasingly apparent that horticulture crops are ideal for achieving sustainability for small and marginal holdings as well as creating productive employment for the vast agricultural labour pool. However, it is only recently that the government and the policymakers have started taking note of the enormous potential of this sector. By improving the prospects for this sector, not just agriculture will become more profitable but this will also help in efficient land utilisation, creating semi-skilled and gainful employment for the rural folks, and optimise the utilisation of natural resources (soil, water, and environment). India has emerged as the largest producer of coconuts, arecanut, cashew, tea, mango, and banana, among others. India is the second largest producer of fruits and vegetables in the world and therefore has a huge potential in the export of these farm products. But only 2-3 per cent of them are processed and as much as 25-30 per cent go waste. Hence, a planned approach towards this sector is required, which will not only raise its foreign exchange earnings but also provide gainful employment.

Dairy Products

India has emerged as the biggest producer of dairy products in the world. But her share in the world trade is very small at 1-2 per cent of world trade of around 40 million tonnes. Part of the reason for this is the fact that more than 60 per cent of India 's milk production is non-cow milk based. The international trade is largely in the dairy products based on cow's milk putting India in a disadvantageous position. India also faces high peak tariffs as indicated in Table 4.2 and many non-tariff barriers in this sector, which has restricted India 's share in world trade of dairy products. Nonetheless, there is huge potential in this sector from export as well as employment point of view as has been amply shown by the cooperative dairy movement in western part of the country. How the country negotiates in the multilateral agreements will also determine India 's exports of dairy products.

Processed Foods

Food processing is an emerging industry in the Indian economy employing a large labour force. There has been a marked acceleration since the late 1990s and the sector has been growing at about 9 per cent annually. The food-processing sector includes many different segments ranging from sugar and related items to edible oils to bakery products, etc. Of these, primary food processing is a major segment with large number of rice-mills/hullers, flourmills, pulse mills and oilseed mills, bakeries, traditional food units and fruit/vegetable/spice processing units in the unorganized sector. With an abundant availability of raw materials, this sector has a potential for sustained high growth in exports as well as domestic consumption.

Industries with Unexploited Export Potential

Toys and Sports Goods

The toy industry represents a classic case of a highly employment intensive industry with a sizeable international market, where India has failed to make a mark. The international market of toys is dominated by China , which has a 75 per cent market share whereas India 's share is an appalling 0.4 per cent. This is an industry where India needs to make a determined effort to enter in the world market. It will not be easy given the Chinese dominant presence, which has the advantage of large scales of production, cheap costs, and access to major design centers in Hong Kong . The major policy challenges are as follows:

• Attracting major MNEs in the industry to set up export bases in India . This may also have major favourable spillovers for the domestic toys industry in terms of technological and market information.

·        Strengthening the domestic infrastructure for toys testing and designing; smaller firms should be provided these facilities on nominal charge basis.

• The toy safety standards recently established by Bureau of Industry Standards (BIS) in tune with EU EN71 should be made mandatory. This will make domestic industry compliant with the standards prevalent in Western countries and will ease the entry in the international markets.

Consumer Electronics and Electronic Hardware

Although India has emerged as a leading player in the IT software industry in the world, it has failed to make a mark in IT hardware and other electronics equipment and components. Except in select segments such as recording media and (colour picture tubes) CPTs, Indian presence in the electronics industry abroad is negligible. Considering the fact that the electronics industry can be highly employment intensive and can generate thousands of jobs in assembling, it’s potential should be developed.

It is clear that there are a number of unexploited opportunities for expanding exports as well as employment, and if we can take advantage of these opportunities, it will be possible to surpass the US$ 150 billion target for exports set by the Government of India for 2009-10 and generate more jobs for India 's youth. In this section we summarise the key policy challenges required to attain the twin objectives of rise in exports along with a rise in employment

Possible Policy Initiatives

Attracting Export-Oriented Foreign Direct Investments

India has not been able to exploit the potential of export-oriented FDI that accounts for 55 per cent of China 's exports and a very substantial proportion of exports in other Southeast Asian countries, although of late MNEs such as Hundai, Ford etc have started using India as a platform for export oriented production. Export-oriented FDI in knowledge-based industries have other favourable externalities as well; they not only result in transfer of technology but also crowd-in domestic investment by creating demand for intermediate goods. Hence, India's ability to offer to MNCs access to a large and expanding domestic market besides other resources such as low cost but high quality human resources, needs to be leveraged effectively for getting them to consider India as a base for export-oriented production.

Fixing Infrastructural Constraints

In a number of industries, infrastructure such as availability of power, congestion of ports among other facilities is becoming a bottleneck. Without addressing these constraints, ambitious plans for export-oriented industrialisation will not materialize. Therefore, these constraints need to be dealt with in an urgent manner.

Strengthening the Enterprise-level Innovative Activity

A firm's in-house technological effort is one of the most important factors in shaping the patterns of competitiveness of enterprises, especially in knowledge-intensive industries. Developed countries spend billions of dollars in Research and Development (R&D) activity in the form of subsidies, which is given to national enterprises to encourage innovations so as to enhance their competitiveness (such subsidies upto 50 per cent of project costs have been made non-actionable under WTO rules). In recent times, the Indian government has set up funds for specific industries such as pharmaceuticals to assist the R&D activity, but these funds have remained underutilised due to arduous conditions attached. There is obviously need for a generous programme to push R&D activity of enterprises by subsidies for viable R&D proposals of industry to strengthen India 's competitive edge.

Linking Export Incentives to Incremental Exports rather than Total Exports

There is a need for prompting more firms into exporting activity and to encourage exporting firms to export a greater proportion of their sales. For this the tax incentives given by the government on export profits could be linked to incremental exports rather than total exports. This would push larger companies to increase their export intensity while inducing small-scale industries.

Moving up the Value Chain

In a number of industries of India's traditional forte such as textiles, garments, leather goods, gems and jewellery, agricultural products, India needs to consolidate her position in the world market and move up the value chain by taking stake in international marketing networks. For example, Tata Tea's acquisition of Tetley Group is an example of taking control of the full value chain in the tea industry. For this, Indian enterprises should be encouraged to build brands, undertake outward investments or acquisitions to establish their presence in major markets and move up the value chain.

Conforming to International Standards

In all the high technology areas the first step towards entering the world market is to ensure that the products are in conformity with the standards prescribed by the importing countries. More often than not standards vary from country to country and that in turn calls for investment in testing facilities which is beyond the reach of many of the producers. In this context, a two-pronged action could be undertaken:

• First, common testing facilities may be set up which may be made use by the prospective exporters.

• Secondly, there is the need for assessing the present situation with respect to the compatibility of our standards with that of prospective importers and enter into mutual recognition with regard to standards and conformity assessment procedures.

Conclusion

India despite being the world’s fourth largest economy in terms of purchasing power parity has a share of just 0.9 per cent in world merchandise trade. Also, despite the high growth of exports in the last four years, India could improve its position among world exporters by merely one notch to 29 in 2005 from 30 in 2004.  Economies like Taiwan, Thailand, Indonesia Malaysia and China, which started around more or less the same level of per capita GDP as India (in the 50s) have not only improved their standing in world exports considerably but have also raised their standard of living, on the other hand India’s share has stagnated in world exports. It is argued that the critical factor has been not the state of international trading environment but domestic policies such as incompetent governance, incentive structure for technological and organisational innovations, infrastructure bottlenecks and stable and responsible macroeconomic management. Exports, as mentioned in the beginning  are an engine of growth; they are not only foreign exchange earners but have many backward and forward linkages with the other sectors of the economy and hence, their full potential in the country’s growth must be tapped by implementing appropriate and conducive policies.

References:

Bhatt P.R (2000), “ India ’s Trade Competitiveness and Exchange Rate Policy” Journal of Social and Management Sciences Volume XXIX, No 3.

Exim Bank of India (2006), “Indian Leather Industry: Perspective and Export Potential”, Occasional Paper No 109

Government of India (2005), Economic Survey 2004-05, Ministry of Finance, Economic Division, GOI

Kapila Uma (2006), “Foreign Trade and Balance of Payments (Editorial Nores)” in Indian Economy Since Independence edited by Uma Kapila, Academic Foundations

Ministry of Commerce and Industry (2004), “Foreign Trade Policy 2004-09”, Government of India .

Ministry of Commerce and Industry (2006), Annual Report 2005-06, Department of Commerce

RIS (2006), ‘Towards an Employment-Oriented Export Strategy: Some Explorations”

Srinivasan T.N (2006), “Foreign Trade Policies and India ’s Development” in Indian Economy Since Independence edited by Uma Kapila, Academic Foundations

Various Media Sources.

 

* This note is prepared by Abhilasha Maheswari