Twenty years of_foreign_trade


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Twenty years of_foreign_trade

  1. 1. Twenty years of foreign tradeThe Indian economy has seen dramatic changes in thelast 20 years, thanks largely to the economic reformsintroduced by the P V Narasimha Rao government in1991. One way of measuring that change would be to seehow India’s merchandise trade has performed in thisperiod. Some changes are so obvious that you cannot missthem. For instance, exports have grown rapidly. At $18billion in 1991-92, they were about seven per cent ofIndia’s gross domestic product (GDP). By 2010-11,exports increased to $246 billion, equivalent to 14 percent of GDP. Imports, too, grew fast in this period — from about $20billion or eight per cent of GDP in 1991-92 to $350 billionin 2010-11, amounting to almost 20 per cent of GDP. IfIndia managed to keep growing and remain stable inspite of a sharp rise in trade deficit in this period, it ismainly because the reforms opened up the economy.This helped the country to receive large flows of foreigncapital – both through direct investment in projects and
  2. 2. through portfolio investments in the capital markets –and meet its balance of payments gap.Several other changes are not too obvious and remainhidden in the trade data. In 1990-91, machinery was thesecond-largest import item, valued at around $5.83billion and accounting for about 24 per cent of India’stotal imports of $24 billion. Twenty years later,machinery imports are much higher, but account for onlyabout 11 per cent of India’s total imports. This is a sign asmuch of India’s growing domestic machinerymanufacturing capacity as of the economy’s risingdemand for capital goods. Clearly, India’s import baskethas grown and diversified in these 20 years.Two items that did not even figure in India’s importbasket in 1990-91 (indeed, they did not do so until 1993-94) but acquired a sizeable 10 per cent share in 2010-11were gold and silver. The economic reforms of 1991paved the way for legal imports of gold and silver and inthe next 20 years, India has emerged as the world’slargest destination of gold and silver exports.
  3. 3. The petroleum sector presents perhaps the mostinteresting change. Petroleum imports, which used toaccount for about a fourth of the country’s total importsin 1990-91, accounted for about 30 per cent of India’stotal imports in 2010-11. That indicates how India’sdomestic oil and gas producers failed to step up domesticoutput, in keeping with the rising demand at home. Thisled to the sharp rise in the oil import bill.However, that is only part of the story. The rise in the oilimport bill was also because several new refinerycapacities came up in this period and began to importcrude oil and export petroleum products. That led to adramatic rise in India’s petroleum product exports in thelast 20 years. From $0.52 billion (about three per cent oftotal exports) in 1990-91, petroleum product exportsrose to account for more than a 17 per cent share in totalexports in 2010-11. Indeed, if exports are taken intoaccount, the net import bill on account of the petroleumsector has seen modest growth and its share in thecountry’s total imports has declined in this period.On the exports front, there are a few more surprises.Agriculture and textiles, which used to account for 42 to
  4. 4. 44 per cent of India’s total exports in the early nineties,are no longer the key drivers of India’s merchandiseexports. The share of textiles in India’s total exports hasfallen to less than 10 per cent and that of agriculture toseven per cent. While gems and jewellery have heldground in the last two decades, the smartest recoverytook place in the engineering sector, a development thathas surprised even policy makers in the government.In 1990-91, engineering goods exports were worth $2.2billion or 12 per cent of total exports. In 2010-11, suchexports accounted for over 24 per cent. The growth ratesfor engineering exports in the last few years have alsobeen impressive, making this the largest foreignexchange earning sector, even ahead of software, whichfetched $59 billion in 2011.Clearly, such growth in engineering goods exports cannottake place just because exporting firms used someincentives or concessions. India’s manufacturing sectorhas certainly acquired a competitive edge that helps itenter export markets with relative ease. That advantageis not likely to go away easily. Nor should, therefore,anyone fear that discontinuing the duty entitlement
  5. 5. passbook (DEPB) scheme would put brakes onengineering exports. The total annual value of the DEPBscheme is only Rs 8,000 crore, so it cannot sustain thekind of rise in engineering exports the country saw inrecent years.The story of India’s exports and imports in the last 20years will undoubtedly have many lessons for thegovernment. As the country prepares to celebrate the20th anniversary of India’s economic reforms of 1991, astudy of how the composition of India’s exports andimports changed over these years is an exercise thegovernment’s current policy makers will find hugelyuseful.