Brief notes on India’s Foreign Trade

Prior to British rule, India was famous in the world for its exportable items, which were bused on cottage and small scale industries. But during the British period India was forced to change its pattern of trade, exporting only the raw materials for British industries and importing the final products to provide a market of the English industries.

Before the Second World War, India was bound to export more than its import, in order to meet the unilateral transfer payments in the shape of salaries and pensions for British officials in India, resulting in a favourable balance of trade position. The direction of trade was pointed towards U.K. amounting 31 per cent of India's total import during 1938-39. However a considerable change in the composition, pattern and direction of trade took place during the planning era, though the deficit in the balance of payment account is increasingly is becoming high.

Foreign Trade during Plan Periods

The First Plan:

During the First Plan, the deficit in the balance of payment was worked out to be Rs 108 crores per annum. This was basically due to the import of developmental capital goods. However, there was no change in the export side during the plan period.

The Second Plan (1956-57-60-61):

The import of the country increased significantly during the 2nd plan period, as there was a change in the very structure of the economy. Due to the implementation of the Mohalanobis model, huge investment was to be made on basic and key industries.

Foreign technology, technical know-how and concessional capital constituted the main items of India's import. Further to meet the internal shortage, enough amounts of food grains had to be imported. The export during the period also slowed down and the much needed diversification of export and export-promotion did not materialise. There was an acute shortage of foreign exchange due to the unfavorable balance of payment situation.

The Third Plan (1961-62-65-66):

During the 3rd plan period, the average import of the country was at Rs 1,224 crores, while the corresponding import was only Rs. 747 crores, resulting in a huge trade deficit. The basic reason for this situation is the need for higher import for our materials and industrial and technical know-how and food grains during the period.

Devaluation of 1966 and period up to 1973-74:

Due to a continuous adverse balance of payment situation since 1951, acute foreign exchange position, growing international borrowing from abroad, India was compelled to devaluate the value of Rupee by 36.5 per cent in June 1966. Due to failure of agriculture, import of food grains became necessary which resulted in a further trade deficit.

However, due to favourable agriculture and reduction of food grain import, along with import restriction and export promotion measures, during 1972-73, the country was able to have a favourable balance of trade position. But in the next year, due to increase in the price of petroleum products, chemical fertilizer and newsprint in the global market again the deficit cropped up. However, the magnitude of deficit during 4th plan period was less than its earlier period.

The Fifth Plan (1974-75):

The value of imports during this period touched a very high level due to increase in prices of petroleum products, fertilizer and food grains. Export during the period also increased significantly, in fish, fish preparations, coffee, groundnuts, tea, cotton fabrics and ready-made garments. During 1976-77, the country experienced a trade surplus.

However during 1977-78 and in the next two years due to a unsystematic liberal import policy, along with stagnant export, the balance of trade became negative.

The Sixth and Seventh Plan:

Due to a further increase in the price of petroleum products, the import bill increased from Rs. 6,814 crores in 1978-79 to Rs.13, 608 crores in 1981-82. The outcome was unprecedented trade deficit, though the export increased considerably during the period. The average annual import during the 7th Plan was Rs 28,874 crores but export average stood up at Rs. 18,033 crores. The trade deficit compelled the Govt. to borrow Rs. 6.7 billions from World Bank and IMF.

Foreign trade from 1989-90 to 93-94:

In spite of a rise in exports, trade deficit shot up to a high figure of Rs. 10,635 crores due to increase in import value as an outcome of Gulf War. During 1991-92, the Govt. went for drastic import reduction and took many policies to increase export. But export in dollar-term did not rise. This was mainly due to the decline in export to Rupee Payment Area (RPA) by 42.5% in dollar terms during 1991-92. During 1991-93, trade-deficit further worsened. The import of oil rose by 13.5%. The disintegration of USSR resulted in an export decline. However, the exports to General Currency Area (GCA) rose by 10.4% in 1992-93, but in RPA it further declined. During 1993-94, export promotion measures, export increased by 19.6%, while the import increased by 6.1%. This resulted in a decline in trade deficit, which requires further to be sustained over a long period of time. The main features of foreign trade are as follows:

(1) Growing value of trade,

(2) Large growth of import,

(3) Inadequate expansion of exports.

(4) Resulting widening trade deficit.