Foreign Trade

Importance of foreign trade

The importance of foreign trade, which helps in economic development, is listed below:

• Helps in making use of abundant raw materials: Countries gifted with natural resources and different assets (labour, technology, land and capital) can produce several items efficiently and trade with other countries in need.
• Gives comparative advantage: In foreign trade, many countries usually have a comparative advantage in different industries and for various reasons. These can be related to natural resources, workers, government investment, or other factors. When countries produce through comparative advantage, wasteful duplication of resources is prevented.
• Greater choice for consumers: International trade brings in different varieties of a particular product from various destinations. This gives consumers a more comprehensive array of options to improve their quality of life and help the country grow.
• Specialisation and economies of scale–  greater efficiency: Foreign trade enables companies to benefit from economies of scale. Multinationals often split the production process into a global production system for high value-added products. 

A vision for global performance

India’s Department of Commerce has the mandate to make the country a major player in foreign trade and assume a role of leadership that can help in economic development.

India’s Foreign Trade Policy (FTP) provides a basic policy and strategy framework for promoting exports and trade. It is periodically reviewed to adapt to the changing domestic and international scenarios.

Take a look at some critical India’s Foreign Trade Policy reforms:

• Trade Policies of 1991: 

     With less than $1 billion in foreign reserves, India had just enough to meet 3 weeks’ imports, pushing the country to take measures to put its economy back on track. These reforms were:

1. Removal of Quantitative Restrictions on Imports by simplifying and liberalising imports. By 1996, import restrictions were removed from 6161 tariff lines.
2. Reduction in Import Tariffs: The government continued to scale down the peak rates of import tariffs in phases.
3. Convertibility of Rupee on Current Account: The exchange rate of the rupee no longer remained pegged. It became a market-determined rate.
4. Decanalisation: Before 1991, most of the imports were made by public sector enterprises on behalf of all importers. The imports and exports of several products were decanalised and continued in the subsequent years.
5. Concessions and Exemptions: Concessions and Exemptions: The government extended some tax concessions and exemptions during the 1990s, such as reducing the peak rate of import duty to 15 per cent and reducing the rates of duties in the information technology sector upon certain critical imports etc.
6. Setting up of Trading Houses: This policy of 1991 permitted the export houses and trading houses to import a wide range of products, and the trade policy of 1992-97 allowed them duty-free imports.

• FTP 2015-20: It focuses on an ambitious export target of 900 billion dollars by 2020, highlighting a visible push for the government’s ‘Make in India’ initiative.

     The two schemes – Merchandise Exports from India Scheme (MEIS), a scheme designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs, and ‘Services Exports from India Scheme, which aims to promote the export of services from India by providing duty scrip credit for eligible exports – were launched under the Indian Foreign Trade Policy (2015-2020) as a part of Exports from India Scheme. 

India engages in regional and bilateral trade negotiations to diversify and expand its export markets.

India’s significant FTAs and PTAs

Currently, India shares preferential market access and economic cooperation through trade agreements with over 50 countries. Some of the major bilateral and regional agreements that India has signed and implemented are listed below:

• Preferential Trade Agreements: Asia Pacific Trade Agreement and Global System of Trade Preferences 

• Free Trade Agreements: India ASEAN Trade in Goods Agreement, South Asia Free Trade Agreement, Indo Sri Lanka Free Trade Agreement, Indo Malaysia Comprehensive Economic Cooperation Agreement, India Singapore Comprehensive Economic Cooperation Agreement, Japan India Comprehensive Economic Partnership Agreements, India Korea Comprehensive Economic Partnership Agreements

Latest Foreign Trade Policy reforms:

India is pushing for fresh FTAs and trade concessions with major economies and regional blocs in 2022 as it chases an ambitious export target of US$450-500 billion by FY23. Meanwhile, as of March 23, merchandise exports from India crossed US$400 billion in the current financial year. 

The growing list of countries and regional blocs negotiating trade deals with India includes the UK, Russia, Canada, the GCC, and the Southern African Customs Union. Trade deals have already been reached with the UAE and Australia. India has signed an interim trade pact (ECTA) with Australia and a CEPA with the UAE.

Impact of Foreign Trade Policy on Indian economy:

Overall, we can say that foreign trade helps in economic development. If we talk about India, our total exports have increased since India’s adoption of the New Economic Policy.

Although India is facing a continuous deficit in its balance of payment, the overall prosperity is unbounded. Despite fluctuations in the GDP growth rate, the trade volume is increasing day by day. The composition of India’s exports has grown significantly. The export of petroleum has shown a considerable increasing trend, and the central portion of Indian exports is in manufactured goods. The composition of India’s imports has also gone up considerably.

The share of imports of petroleum and crude products and other non-bulk items have increased significantly, while the imports of food grains and export-related items have declined. It is also found that though import has a negative influence on economic growth, the volume of trade reflected by economic openness has a  positive impact on India’s economic growth, and its magnitude is increasing continuously.