J. S.

Mill, while discussing the gains from trade, pointed out

that setting
aside its enabling countries to obtain commodities which they could not
produce themselves, its advantage consists in a more efficient employment
of the productive forces of the world. The growth of a developing country
depends upon their ability to trade relatively freely with the rest of world. On
the other hand, economic growth led by exports is accompanied by flow of
capital and acquisition of new technology, rising level of savings, economies
of scale, etc. This also leads to improvement in quality and forces firms to cut
costs, and seek new ways of producing and selling their goods. These
measures would improve the productivity of the different sectors of the
economy. In this Unit we shall learn about Indias Foreign Trade and
Balance of Payments.
Objectives:
At the end of this Unit, you will be able to :

Explain the role of foreign trade in the economic development of a country

Explain the trend in Indias Foreign trade

Explain the concept of balance of payments

Understand the compositio

n and direction of Indias foreign trade

Understand the problems of foreign trade of India

1.2 Trends i
n Indias Foreign Trade
Exports from India had been more or less stagnant during 1951-60,
averaging a little over Rs. 600 crores per annum. There was marginal
increase in exports towards the end of Third Five Year Plan (1965-66) when
the exports touched the level of Rs. 816 crores, and this level of exports
doubled in seven years between 1965-66 and 1972-73. Since 1972-73, the
rate of growth in exports had been so fast that in a short span of five years
the level of exports reached a figure of Rs. 5142 crores in 1976-77 exceeding
imports by Rs. 68 crores. This figure went up to Rs. 15674 crores in 1987-88
and Rs. 27658 crores in 1989-90. The total value of exports was Rs. 32553
crores in 1990-91. During 1986-87 to 198990, Indias exports increased at the annual growth
rate of 17% in dollar terms or 26.5% in rupee terms. However, there was a
major slowdown in export growth during 1990-91, signaling a reversal of the

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buoyancy witnessed in early years. The export growth in 1990-91 was very
modest at 9.1% in dollar terms and 17.6% in rupee terms. On the other
hand, imports continued to grow since 1955-56. As can be seen from Table
1.1 that Imports which stood at Rs. 608 crores in 1950-51, causing trade
deficit of only Rs. 2 crores, increased to Rs. 1634 crores in 1970-71. The
reasons for this increase were: (i) large volume of food imports. (ii) large
import of capital equipment due to increase in the tempo of developmental
effort, (iii) increasing requirements of maintenance imports, (iv) heavy
increase in defence imports, and (v) increase in import prices. Further
imports increased at a much faster rate after 1970-71 and it reached the
level of Rs. 9143 crores in 1980-81 and Rs. 43198 crores in 1990-91. This to
a large measure was the outcome of a near-stagnation in domestic crude oil
production necessitating substantial volume of POL imports.
Table 1.1: Trends in Foreign (in Rs. Crores)
Year Exports Imports Trade Balance
1950-51 606 608 -2 1960-61 642 1122 -480 1970-71 1535 1634 -99 1980-81
6418 9143 -2725 1990-91 32553 43198 -10645 1991-92 44041 47851 -3810
1992-93 53688 63375 -9687 1993-94 69751 73101 -3350 1994-95 82674
89971 -7297 1995-96 106353 122678 -16325 1997-98 130100 154176
-24076 1996-97 118817 138920 -20103 1998-99 139752 178332 -38580
1999-2000 159561 215236 -55675 2000-01 203571 230873 -27302 2001-02
209018 245200 -36182 2002-03 255137 297206 -42069 2003-04 293367
359108 -65741 2004-05 375340 501065 -125725 2005-06 456418 660409
-203991 2006-07 571779 840506 -268727 *2007-08 *448377 *682088 *233711
* April

December 2007
Source:
Economic Survey 2007-2008.

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1.2.1 Foreign Trade Since Liberalisation
The reversal of the trends in the export growth during 1990-91, and
thereafter, required a massive export thrust. Since July 1991 the Government
of India initiated the process of economic reforms aimed at globalization and
liberalization of Indian economy. A number of policy changes were
announced leading to the declaration of the Export-Import Policy 1992-97.
This policy brought about all round liberalization of exports and imports. The
constraints on growth imposed by the bureaucratic controls, licensing
procedures and other restrictions were removed to a great extent. Besides,
under the Liberalized Exchange Rate Management System (introduced as a
result of the simplification of the foreign exchange law and procedures), the
entire amount of export proceeds can now be converted into Indian rupees at
the market determined rate of exchange. As a result, we have only one
unified rate of exchange on current account i.e. the market rate of exchange.
The policies relating to foreign collaboration have also been liberalized to
facilitate greater business initiatives aimed at faster growth. The changes
thus introduced in the policy framework led to the faster growth in exports
from India. The volume of exports touched the level of US$ 18.87 billion at

the end of 1992-93, as against the level of US$ 18.26 billion at the end of
1991, indicating future growth potential. This trend had continued and the
exports reached the level of US$ 26.33 billion as at the end of 1994-95 and
US$ 31.80 billion at the end of 1995-96. The growth in exports was quite
encouraging with growth rates being 20% for 1993-94, 18.4% for 1994-95
and 20.8% during 1995-96. There was however, reversal in growth trends
with growth rate falling to 5.3% for 1996-97 and 4.6% for 1997-98. The year
1998-99 was the worst year for
Indias exports with exports recording a negative rate of growth of 3.9%. The
decline in exports was caused mainly due to recession in global trade, fall in
prices in the international market, infrastructural bottlenecks, introduction of
strict sanitary and phyto-sanitary standards by developed countries and so
on. However, the year 1999-2000 has witnessed recovery in the exports
sector with exports recording a growth of 11.12% for the period of AprilFebruary, 2000. This trend continued and exports recorded the growth rate
of 11% for the year 1999-2000 followed by 20% for year 2000-2001.
However, the

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24.07 -5.93 19.41 -1.55 21.88 -3.34 23.31 -1.07 28.65 -2.32 36.68 -4.88
39.13 -5.66 41.48 -6.48 42.39 -9.17 49.67 -12.85 50.54 -5.98 51.41 -7.58
61.41 -8.69 78.15 -14.31 111.52 -27.98 149.17 -46.07 185.75 -59.39 *168.80
*-57.84

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