Trade patterns As a British Colony, India’s economy thrived, with a 22.6% share of the world’s total income After India earned its independence, their primary goal was to evolve into a self-sufficient nation Consequently, India utilized protectionist measures – import substitution, industry restrictions etc. The 1980s marked a shift in economic policies – trade liberalization and deregulation 1991 – High inflation, account deficits, foreign exchange crisis IMF loans India $5 billion…further trade liberalization occurs
direction & composition of trade As foreign competition was permitted through reform, India began to specialize Initiative for training and developing labor human capital became more skilled, manufacturing capabilities increased Transition from low level industries (mining & agriculture) to higher quality manufactured goods Presently, India is a service-oriented nation Technological services Destination of India’s exports
Foreign Direct investment Direct investment by Institution Investors, Non resident Indians & Overseas Corporations relaxation of foreign investment requirements, implementing the “automatic rule” India has surpassed the US as the 2 nd most appealing nation for fdi. Integrating with the global economies has modernized India $2.573 Billion USD in 2005…and 18% increase from 2004.
Foreign Debt analysis Short-term debt (overnight – 12 mo. Duration) overnight money market instruments swaps, repos derivative instruments 3-12 month treasury notes Long-term Debt ( 1-7 year duration ) multilateral loan packages bilateral debt financing IMF program loans trade credit Commercial borrowing Non-Resident Indian deposits Rupee debt debt service ratio ( 10.2% fy 2006 ) total debt / GDP ratio ( 15.8% ) short-term debt / reserves ( 6.4% ) reserves / total debt ( 121% surplus to debt )
Foreign exchange system the reserve bank of India formulation of monetary policy regulation of financial & banking systems currency exchange control standards Indian Rupee trade-weighted basket of currencies (1975-1992) provisional floating exchange (1993-present) free floating exchange rate (2009???) liquidity risk rate of gdp growth rate of inflation risk-adjusted capital flows (investment)
export promotion foreign exchange regulation act (1992) Automatic approval of foreign capital De-regulation of investment policy Permitted 51% foreign majority ownership profit repatriation de-couple dividends from matching exports non-resident repatriation of profits & capital promote high priority development sectors special economic zones 15 year corporate income tax holiday 17 duty-free zones ( 120 prospective sites ) favored nation tariff / trade treatment
protectionism post-colonialism closed economy 200% average tariffs Extensive import restrictions trade reform (1990’s) Non-agricultural tariffs < 15% Import quantity restrictions lifted FDI deregulation Areas of contention Agricultural tariffs 30-40% anti-dumping measures Doha negotiations & beyond
trade liberalization 1991 – Rao initiates change lowered tariffs and taxes modified tax regulations to promote foreign investment developed key trade partners – US, China, EU protected against losing economic autonomy Reasons for success supply superior labor/demand technology abundant resources balance of trade between imports/exports and various trade partners export goods with demand longevity
privatization initiative Privatizing Debate government controlled sectors auctioned to private investors Benefits Promote efficiency Better utilization of resources Profitability helps country Problems Only the wealthy stand to profit Potential unrest – 50 million protesters Repercussions from trade partners?