India's Foreign Trade - the Challenges and Prospects

Team Members

Arun R - 10DM-020Deepmala Roy - 10DM-040Aditya Agarwal - 10DM-007Amit Kumar Rai - 10IB-008Ajay Thakral - 10IB-005Aditya Singh - 10FN-005

Foreign Trade

International trade is exchange of capital, goods, and services across international borders or territories. In most countries, it represents a significant share of gross domestic product (GDP). While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries.

Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact on the international trade system. Increasing international trade is crucial to the continuance of globalization

Can also be Investing in Foreign Securities – defined this way occasionally

Mainly Imports and Exports

Importance of Foreign Trade

From Import Perspectives1. Helps in development of the economy 2. To meet shortages3. Imports for better standard of living4. Improving quality of production From Export perspectives1. Helps in growth of the economy Increases production Income and employment generation Expansion of related industries2. Better utilization of resources3. Overall increase in demand for other Goods

India’s Share in world trade

India's share in the global trade, including trade in merchandise and services sector, has increased from 0.4% in 1980-95 to 1.1 percent in 2004 to 1.5 percent in 2006 and has crossed the two percent in 2009. Foreign trade, as a percentage of GDP (in rupee terms) was over 25% in 2006, up from 14.1 percent in 1990-91. 

Trade Agreement

Regional and Bilateral Trade Agreements

India has recently signed trade agreements with its neighbors and is seeking new ones with the East Asian countries and the United States. Its regional and bilateral trade agreements - or variants of them - are at different stages of development: 

India-Sri Lanka Free Trade Agreement, Trade Agreements with Bangladesh, Bhutan, Sri Lanka, Maldives, China,

and South Korea. India-Nepal Trade Treaty, Comprehensive Economic Cooperation Agreement (CECA) with

Singapore.  Framework Agreements with the Association of Southeast Asian Nations

(ASEAN), Thailand and Chile.   Preferential Trade Agreements with  Afghanistan, Chile, and Mercosur (the

latter is a trading zone between Brazil, Argentina, Uruguay, and Paraguay).

World Bank

 World Bank has focused on providing analysis on specialized subjects at the Government’s request.

In the last three years, the Bank has been working with the Ministry of Commerce in a participatory manner to help the country develop an informed strategy for domestic reform and international negotiations.

Given the sensitivity of trade policy and negotiation issues, the Bank’s role has been confined to providing better information and analysis than was previously available to India’s policymakers.

World Bank Reports Over the last two years, the World Bank has completed two reports: Sustaining India’s Services Revolution: Access to Foreign Markets, Domestic Reforms and

International Negotiation: The study concludes that to sustain the dynamism of India’s services sector, the country must address two critical challenges: externally, the problem of actual and potential protectionism; and domestically, the persistence of restrictions on trade and investment, as well as weaknesses in the regulatory environment.

From Competition at Home to Competing Abroad: The Case of Horticulture in India: This study finds that the competitiveness of India’s horticulture sector depends critically on efficient logistics, domestic competition, and the ability to comply with international health, safety and quality standards. The study is based on primary surveys across fifteen Indian States.

A third study, dealing with barriers to the movement of professionals is under preparation.

Private Capital Flows, Current Account Balances and External Debt of Emerging

Economies

During 2008, global exports of goods amounted to US$ 15.8 trillion implying a growth of 15.6 per cent over the previous year’s total of US$ 13.7 trillion

In volume terms, the growth in global trade of goods in 2008 stood at 3.2 per cent as compared to 6.6 per cent witnessed in 2007.

Many emerging market and developing countries have experienced historically high levels of net foreign exchange inflows, through both current and capital accounts, over the past years

The net foreign exchange flows were largely contributed by significant rise in private capital flows

Net flows to emerging market economies had reached a record level of US$ 928.6 billion during 2007,before reducing to US$ 465.8 billion in 2008, on account of the recent financial crisis

Net direct investment stood at US$ 263.4 billion in 2008, compared to US$ 304.1 billion in the previous year

WHY INDIA as FDI destination?

Liberalization in 1991Quantitative restrictions on imports have been

eliminated, Foreign investments norms have been relaxed for a

number of sectors.Survived recession of 2007Cheap Human resourceLarge English speaking work forceCultural politeness and humbleness suits service

industryLiberalization of FDI limits in major sectors which

pushed FDI in IndiaAverage non-agricultural tariffs have fallen below

15 percent

EXPORT AND IMPORT ENABLING SCHEMES

Exports and Imports shall be free, except in cases where they are regulated by the provisions of this Policy or any other law for the time being in force.

Units in EOU/ EHTP/ STP/ SEZ shall be exempted from service tax. The duty free entitlement for the import of trimmings,

embellishments and footwear components for footwear (leather as well as synthetic), gloves, travel bags and handbags shall be 3% of FOB value of exports of the previous financial year.

Duty free import entitlement of consumables for metals other than Gold, Platinum shall be 2% of FOB value of exports during the previous financial year.

New Handicraft SEZs shall be established which would procure products from the cottage sector and do the finishing for exports

Duty free import entitlement of hand knotted carpet samples shall be 1% of FOB value of exports during the previous financial year.

Duty free import of old pieces of hand knotted carpets on consignment basis for re-export after repair shall be permitted.

NEW EXPORT PROMOTION SCEHEMES

The Central Government will assist in the modernisation and upgradation of test houses and laboratories in order to bring them at par with international standards.

Target plus scheme to accelerate growth of exports.

Vishesh krishi upaj yojna for agro-exports.Served from India scheme

NEW EXPORT PROMOTION SCEHEMES

Additional flexibility under EPCG(Export Promotion Capital Goods

Scheme)Import of fuel under Duty Free Replenishment

Certificate(DFRC) entitlement allowed to be transferred to marketing agencies authorized by Min of Petroleum and Natural Gas.

The DEFB scheme will be continued.(Duty Entitlement

PassbookScheme is to neutralize the incidence of Customs duty)EOUs shall be exempted from Service Tax in

proportion to their exported goods and services.A scheme to establish Free Trade and Warehousing

Zone is introduced to create trade-related infrastructure to facilitate import and export with freedom to carry out trade transactions in free currency.

Capital Markets

Net portfolio investment in India in 2008-09 stood at US$ (-)13.86 billion, implying a sharp decrease from US$ 29.4 billion in 2007-08

This may be attributed to the considerable decrease in net investment by Foreign Institutional Investors (FIIs), from US$ 20.3 billion in 2007-08 to US$ (-)15.0 billion in 2008-09

Foreign Trade and Balance of Payments

India’s exports during 2008-09 amounted to US$ 168.7 billion, as compared to US$ 163.1 billion recorded during the previous year, registering a growth of 3.4 per cent

India’s imports during the year stood at US$ 287.8 billion, as compared to US$ 251.7 billion during the previous year, registering a growth of 14.3 per cent

Overall, trade deficit for 2008-09 rose to US$ 119.1 billion from US$ 88.5 billion in the previous year

With regard to commodity composition of India’s main exports in 2008-09 (April-February), growth was particularly robust in the case of transport equipments (64.6 per cent), primary and semi-finished iron and steel (21.8 per cent), and machinery and instruments (20.0 per cent)

Foreign Trade and Balance of Payments

Oil imports increased to US$ 93.2 billion during 2008-09 from US$ 79.7 billion in the previous year, registering a growth of 16.9 per cent

Non-oil imports during 2008-09 stood at US$ 194.6 billion, which was 13.2 per cent higher than the level of such imports valued at US$ 171.9 billion in the previous year

India’s net inflow of invisibles increased to US$ 68.9 billion in 2008-09 (April-December) as compared to the net inflow of US$ 53.8 billion recorded in the corresponding period in 2007-08

Foreign Trade and Balance of Payments

The strong growth in services exports, especially of software and information technology (IT) services, and remittances from overseas Indians, have imparted stability to invisibles receipts

Services exports were valued at US$ 74.5 billion and net transfers at US$ 35.1 billion during the period 2008-09 (April-December)

Services exports remained strong on account of the steady growth in software exports valued at US$ 34.6 billion during 2008-09 (April-December), coupled with growth in export of business services to US$ 12.7 billion and financial services to US$ 3.4 billion

Foreign Trade and Balance of Payments

Current account deficit widened to US$ 36.5 billion during 2008-09 (April-December) from US$ 15.5 billion in the corresponding period of 2007-08

Reflecting the confidence of international investors in the Indian economy, foreign direct investment inflows stood at US$ 33.6 billion in 2008-09, with 83.0 per cent attributable to equity investments

India’s foreign exchange reserves decreased to US$ 252 billion as at end-March 2009, from US$ 309.7 billion as at end-March 2008

India’s external debt, which stood at US$ 224.8 billion as at end-March 2008 increased to US$ 230.9 billion as at end-December 2008, primarily on account of higher level of long term debt

Challenges Ahead

Indo-US partnership – American Unilateralism, support of Pakistan’s regime that fosters terrorism against India, and future containment of China and Iran

Iran forms the second pillar of India’s engagement in the region, any US interference could jeopardize the stability

The Pakistani government’s continued stubbornness poses a strong challenge to India’s foreign policy

Nepal’s Maoist movement continues to ravage the countryThe core problem in India – Bangladesh relations is

Bangladesh’s insecurity over its identity which manifests a paranoid suspicion of a larger and more powerful neighbor

China continues to play dual twin roles of engaging India while simultaneously backing Pakistan and other smaller neighbors acquire military items

What lies ahead?

Overtime, India’s policy has matured into a balanced engagement of the major powers, and strategically important regions

India must continue to engage while avoiding entanglementsForeign policy must tread a focused path between advancing

long term goals and agile enough to respond to abrupt changes

India’s foreign policy will aid in choosing allies, forming partnerships based on mutual interests, and in fending off old and new enemies

The issues of international terrorism, Islamic fundamentalism, competition for a sphere of influence and acquisition of energy will dominate India’s policy in the foreseeable future

Outlook for Key Sectors of the Economy

Textiles and Garments - The slowdown in demand for textiles and clothing from major importers such as US and EU, is likely to affect the growth prospects of this sector

Drugs and Pharmaceuticals - Is one of the fastest growing segments of Indian manufacturing sector. The size is estimated to be over US$ 17 billion, of which around US$ 6 billion is being exported. It is estimated that it is ranked 4th in terms of volume and 14th in terms of value globally

Automotives - the advantage of easier and better availability of auto finances in India has been diminishing significantly since Recession. Despite tough conditions, exports were robust for passenger vehicles with overseas shipments growing by 53 per cent during 2008-09. It has the capability to manufacture the entire range of vehicles and auto-components, at competitive costs.

Outlook for Key Sectors of the Economy

Engineering Goods - is on a growth path fuelled by a well diversified market that produces a range of products such as capital goods / machinery and equipments, and light engineering goods

Chemicals – remain challenging, particularly in the context of global economic crisis, with major end-user segments facing reduced demand

Petroleum - stands out as an example of the strides made by the country in its march towards self sufficiency in production of petroleum products. It’s exports in India’s total exports grew from 4.8 per cent in 2001-02 to 17.4 per cent in 2007-08

Food Processing - is facing the pressure of rising operating costs, despite a slowdown in commodity prices. Though the processed food product exports from India hold significant potential, the medium term outlook may be impacted by several factors, including the pressure on cost competitiveness

Policy Environment

Both the Government and the Reserve Bank have acted to protect the economy from the adverse impact of the global financial crisis

The Ministry of Commerce and Industry announced on February 26, 2009, several trade facilitation measures

Measures aimed at managing foreign exchange liquidity include upward adjustment of the interest rate ceilings on the FCNR(B) and NR(E)RA deposits; substantial relaxation of the ECB regime; allowing NBFCs/ HFCs access to foreign borrowing and allowing corporates to buy back FCCBs

Reserve Bank of India has also instituted a rupee-dollar swap facility for banks with overseas branches and to Exim Bank to assist in managing short-term funding requirements

Prospects – Bright Side

India has tremendous possibilities in boosting export revenues from India in services sectors provided it invests heavily in infrastructure, reforms its administrative system, puts a hold on corruption and takes up aggressive marketing in global markets

New approaches to accessing world markets and strengthening domestic markets will be required simultaneously

Presently USA having 5% of population has 1/3rd of global wealth, whereas China and India having 2/3rd of world population have merely 5.5 % of wealth

China has clearly taken the lead in terms of FDI and GDP growth rates becoming manufacturing hub for most of MNCS in the world, now it is India’s turn

Thank You