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The Changing Face of India's External Trade

India's trade profile has undergone significant changes in recent years. Engineering products have come to the fore, leading our export effort. Imports have meanwhile risen sharply to service the needs of a growing economy. The direction of trade is also changing with more exchanges taking place with developing countries. This paper looks at these changes from the turn of this decade and examines broadly how we may approach the potential growth areas in the future.

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The Changing Face of India’s External Trade

V S Seshadri

India’s trade profile has undergone significant changes in recent years. Engineering products have come to the fore, leading our export effort. Imports have meanwhile risen sharply to service the needs of a growing economy. The direction of trade is also changing with more exchanges taking place with developing countries. This paper looks at these changes from the turn of this decade and examines broadly how we may approach the potential growth areas in the future.

The views expressed in the paper are the author’s own and not those of the government. The author would like to thank S N Menon who kindly reviewed an earlier version of the paper and gave very useful suggestions.

V S Seshadri (villurvirgo@yahoo.com) is with the Indian Foreign Service and is presently based in Slovenia.

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august 29, 2009 vol xliv no 35

1 Introduction

B
y 1 April 2001, when it withdrew all the remaining quantitative restrictions (QRs) based on balance of payments considerations, India had finally in place a normal international trading framework and the only set of conditions governing import of goods consisted of import tariffs, trade rules and health, safety and standards regulations. While India’s external trade took nine years to double from $18.1 billion in 1990-91 to $36.8 billion in 1999-2000, it began doubling in three years time from 2002-03. India’s merchandise exports crossed the $100 billion mark in 2005-06 and reached another milestone of 1% in world exports in 2006. India’s imports grew even faster, going past the $200 billion figure in 2006-07, while also registering 1.5% of world imports in 2007.

Many policy initiatives taken as part of India’s economic reform and liberalisation contributed to this dynamism that also benefited from a favourable international environment until the onset of the present crisis. A progressive reduction in basic customs tariff from a peak rate of 40% in 2001 to 10% in 2007 for most non-agricultural products and a host of export promotion programmes that has made it less onerous to import for export manufacture, have brought gains. Trade facilitation and faster customs procedures and improvements in trade infrastructure including more port and freight transport capacities have helped. Restructuring undertaken in some of our manufacturing sectors has enabled them to become export-competitive, thanks also to product diversification and specialisation. Dereservation of industries earlier reserved for manufacture by small-scale units has opened up new opportunities. Exports from new special economic zones (SEZs), that now have an assured legislative framework, are making a beginning. Foreign investments have also pitched in, even if relatively marginally, and there are also instances of multinationals manufacturing in India that integrate into their global supply chain.

It can well be argued that much more needs to be achieved in each of the above areas as well as others. The object of this article, however, will be limited to looking closely at where the expansion in trade has come from and in which destinations our exports are showing greater buoyancy. The relative shift in the shares of different product groups and the changes seen in the direction of trade will be commented upon. A key issue then is whether these promising sectors and markets have continuing potential for further expansion in the coming years.

2 Growth in Overall Trade

Between 2000-01, taken as the base of the period focused in this paper, and 2007-08, for which latest disaggregated figures are

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available (Table 1), India’s total merchandise exports grew from $44.56 billion to $162.98 billion, that is by a multiplicative factor of 3.7. India’s imports grew even faster, by almost five times, from $50.53 billion to $251.56 billion in these seven years. India’s economic growth during much of this period also rose sharply, the simple average of growth rates being 7.25%. But the still higher growth rate of external trade meant that total trade as a share of gross domestic product (GDP) rose to 38.6% in 2007-08 from only 22.8% in 2000-01.

Table 1: Rapid Rise in India’s External Trade (Value in billion $)

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

India’s exports 44.1 43.8 52.7 63.8 83.5 103.1 126.3 162.98

India’s imports 49.97 51.4 61.4 78.1 111.5 149.2 185.6 251.6

Total merchandise trade as a percentage of GDP 22.83 21.86 24.6 25.89 30.69 34.36 37.55 38.6

Source: Refer note 1.

India can, therefore, be said to be getting more closely linked with the global economy. For the sake of comparison, it may be mentioned that countries like China, Republic of Korea and South Africa had much higher trade to GDP ratios of 67%, 71.5% and 56%, respectively in 2006, while for Brazil it was much less at around 21%.

3 Exports: Sectoral Performance

The export performances of the different product groups¹ in 2000-01 and 2007-08 are captured in Table 2. It is seen that their relative ranking and shares in total exports have undergone significant changes over the seven-year period.

The textile sector, including apparel, which was the largest export sector and accounted for almost a quarter of our exports has dropped to being fifth in rank and less than half its earlier share. This is despite (or is it because of) the dismantling of the textile quota regime in the developed markets from 1.1.2005 as per the World Trade Organisation (WTO) Agreement on Textiles and Clothing (ATC). On the other hand, engineering goods exports that ranked as No 4 in 2000-01, have performed quite well and form the largest product group with a 20.69% export share in 2007-08.

How has this transformation come about? On the one hand, our textile and apparel exports have been able to grow only incrementally. A visit to some of the apparel stores in the developed markets or to a major international clothing fair indicates that the “Made in India” garments are still largely confined to informal or casual wear and not formal wear and made mostly out of 100% cotton. (Cotton T-shirts, for example, HS code 610910, is the single largest item of our apparel exports.) Product or fabric diversification has not been robust, while even relatively newer entrants like Bangladesh and Vietnam, not to talk of China, have performed a great deal better using a variety of fibres and moving into value added items. Bangladesh, for example, accounts in volume terms for 20% in men’s trousers, 22% in woven shirts and 40% in man-made fibre sweaters in the US market even if the products are mainly destined for the lower end of the market. In textile made-ups, including bed and table linen, we seem to be progressing quite slowly even as other countries have been able to introduce higher counts, finer fabric and better finishing, with

44 more automated spinning, weaving and other operations. (Of course, there are a few companies that have catered to the higher end of the market, but these are exceptions.)

As per WTO statistics, Bangladesh and Vietnam’s share of world clothing exports increased to 2.9% and 2.1% in 2007, from 2.6% and 0.9%, respectively in 2000. On the other hand, India experienced a decline from 3.0% in 2000 to 2.8% in 2007. Again, as per WTO statistics, India’s share of world textile (excluding apparel) exports increased from 3.6% in 2000 to 4.0% in 2007, while that of Turkey went up from 2.3% to 3.7% and of China from 10.3% to 23.5% during the same period. The European Union (EU) continued to have a major share with extra EU exports remaining more or less steady at 10%. Clearly, therefore, we have not had significant increases in market share in world trade in textile and clothing even though trade has become free in this sector after 2005. It may be argued that even holding on to our market share was a great challenge in the face of the sharp surge in exports from China and severe price competition from others is also constraining us. Some may also consider that it may perhaps be too early to make an assessment about post-ATC performance. Even as this may be the situation, there is a further challenge in store from this year since China has been freed of all quotas and restrictions in the EU and US markets from 1 January 2009.

Engineering exports, on the other hand, have performed well and, as a group, may have fared even better if anti-dumping and

Table 2: Exports – Sectorwise Performance (Value in million $)

Rank in Principal Exports in Export in Percentage Growth Rank in
2000-01 Items/Groups 2000-01 2007-08 2007-08/2000-2001 2007-08
1 Textiles (including apparel) 10,693.60 18,483.36 73 5
(24.26) (11.34)
2 Gems and jewellery 7,384.01 19,688.31 166 4
(16.75) (12.08)
3 Chemicals and related products 6,177.07 22,358.06 261 3
(14.01) (13.72)
4 Engineering goods 5,673.08 33,726.06 494 1
(12.87) (20.69)
5 Agriculture and allied products 3,880.15 13,517.51 248 6
(8.8) (8.29)
6 Leather and leather products 1,944.44 3,504.21 80 9
(4.41) (2.15)
7 Petroleum products 1,892.43 28,376.95 1399 2
(4.29) (17.41)
8 Marine products 1,393.76 1,721.30 23.5 12
(3.16) (1.06)
9 Ores and minerals 1,152.99 9,124.26 691 7
(2.62) (5.6)
10 Electronic goods 1,119.94 3,499.86 213 10
(2.54) (2.15)
11 Unclassified exports 731.38 4,079.18 458 8
(1.65) (2.5)
12 Handicrafts 661.51 508.49 -23 15
(1.5) (0.31)
13 Plantation 650.90 970.76 49.2 13
(1.48) (0.6)
14 Carpets 581.68 943.20 62 14
(1.32) (0.58)
15 Sports goods 64.62 134.18 106 17
(0.15) (0.08)
16 Cotton raw including waste 48.39 2203.08 4489 11
(0.11) (1.35)
17 Project goods 25.59 145.14 457 16
(.058) (0.089)
Total 44,075.54 162,983.91 270

Percentage shares of export in 2000-01 and 2007-08 are given in parantheses. Source: Same as Table 1.

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countervailing duties had not been imposed on certain steel and steel products in the US and EU markets during this period. Some of the larger Indian corporates that underwent restructuring in the 1990s have made a difference that not only enabled exports of primary steel and alloys of all shapes and types to grow, but also of forgings and castings, motor cars and two-wheelers, tractors and automobile parts, valves and compressors, wind turbines and electrical machinery, fasteners and ball bearings, to mention just some of them. This is also brought out in Table 3 that shows that the increase in exports of engineering products was quite secular covering a wide category of products.

Of course, many of our large- and medium-sized engineering firms still do not have significant export profiles.² But the fact that some have ventured out successfully, and brought their brand images to improve on the country’s brand image in the g lobal market place, has made a difference. Unlike, however, some of the east and south Asian export-led economies, whose electronics sector contributed significantly to their accelerated export growth, this has not been the case in India. Export growth has been relatively modest in this sector with certain items like recordable discs even witnessing a decline after some strong growth initially.

Another star performer in recent years is the group of refined petroleum products whose exports commenced in a major way only in 2000-01, but rapidly climbed to account for $28.3 billion in 2007-08, catapulting it from eighth in rank to No 2 position. Admittedly, if value addition is examined, the net export value may be much less. Even so, the net earnings should still be significant. Some have also argued (for example, Kumar and Palit (2007)) that these exports are a consequence of the nature of incentives in the administered oil price regime. This still points to the export utility of the substantial refining capacities created in the country producing a wide variety of distillates. Furthermore, this provides us some elbow room in a strategically important sector, particularly when it is seen that these exports go to a wide variety of destinations including some crude oil producers.

Chemicals and related products constitute another important area where the intervening years have seen significant export growth, more or less matching our overall export growth. These cover a wide range of items from fine chemicals and pharmaceuticals to dyes and from plastics to rubber products. While most of these items have done well, pharmaceutical products have shown the lead. Bulk drugs, intermediates, generics and formulations³ have all been growth drivers. Many Indian manufacturers have upgraded their manufacturing facilities enabling the country to have one of the highest number of plants certified by the United States Food and Drug Administration (USFDA) and other regulatory agencies. Names like Ranbaxy, Cipla, Dr Reddy’s, Wockhardt and Lupin have become well known internationally along with I ndia acquiring a label of being a cost-effective but world-class g eneric drug manufacturer. Our companies have also gained

o pportunities through successful legal challenge of certain about to expire patents in the US market. Several Indian companies are also involved in contract manufacturing for well known international pharma companies. All this has been possible because of the strong manufacturing base, availability of scientists in c hemical synthesis and process engineering, research and development

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Table 3: Changing Trends in Five Large Engineering Product Categories (in million $)

HS code Products Covered Exports in 2000-01 Exports in 2007-08

72 Iron and steel 1,132.66 6,559.94

73 Iron and steel products 1,018.36 5,210.59

84 Non-electrical machinery 1,428.29 6,797.52

85 Electrical machinery 1,292.47 5,347.58

87 Road transport vehicles and parts 932.76 4,481.90

Source: Same as Table 1.

(R&D) infrastructure and a growing healthcare industry. The sector has encountered some problem however. Cases have arisen where US FDA has halted import of drugs from one or two manufacturing plants in India because of alleged manufacturing violations. Recall of drugs have also taken place either as a precautionary measure by the companies themselves or because of actions from regulatory authorities. One company is also reportedly under investigation by the European Commission on competition grounds in respect of one drug. While the affected business from all these cases still constitute a small part of our pharma exports, it is important that our companies take effective remedial action in a sector where maintenance of high manufacturing standards, strict compliance with regulations and assurance of safety and effectiveness of drugs are paramount. Indian companies also need to monitor and carefully deal with the international market situation in which some of the competitors are powerful global players.

Gems and jewellery have also not lost their glitter with exports performing reasonably well, but for some setback as a result of withdrawal of Generalised System of Preferences (GSP) benefit for them in the US market in 2007. While the industry today is greatly affected as a result of recession and the sudden decline in demand, it has nevertheless achieved a significant level of value addition both in terms of cutting and polishing higher carat diamonds and in moving towards diamond-studded gold jewellery. In fact, diamond-studded jewellery is the fastest growing item (HS code 71131930) in this sector and India’s exports of these products rose from $471 million in 2000-01 to $3,259 million in 2007-08.

While the slogan “Eleven out of every twelve diamonds are cut and polished in India” is recognised in jewellery trade circles, and India’s dominance in this area is reflected also in a significant presence in practically all the major jewellery trade fairs, it is debatable if this has got translated into a valued India brand for a jewellery customer in the world marketplace. What can be stated is that the industry has made significant investments in this skill-intensive sector. The intricate networking, quite often with family ties, that Indian companies have developed connecting important jewellery centres like Antwerp, Bangkok, Hong Kong and New York has served as an advantage in this sector involving trade in high value items, where trust is an important element.

Agriculture and allied products is yet another product group that has done well with newer products joining the export basket. Not all products have done well, however, as Tables 4a and 4b (p 46) would show. Moreover, fluctuating commodity prices, sudden production drops, rising domestic consumption and the consequent uncertainty about surpluses available for export have impacted on the performance of certain commodities in certain years. Among cereals, the staple export item has been basmati rice which we now export to the tune of 1 to 1.5 million tonnes per

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Table 4a: Some Agricultural Products that Have Done Well (Values in $ million)

Major Items Whose Exports were Three Times or More in 2007-08 Exports in 2000-01 Exports in 2007-08

Rice 641.84 2,920.12

Others cereals (mainly maize) 8.48 746.09 Sesame and niger seed 130.31 430.49 Groundnut 69.26 261.94 Oil meals (mainly soya) 447.57 2,022.95 Sugar and molasses 110.56 1,407.21 Fresh fruits and vegetables 184.59 726.74 Meat and preparation (mainly buffalo meat) 321.70 931.75 Spices 354.11 1,044.83 Poultry and dairy products 46.63 345.36

Source: Same as Table 1.

Table 4b: Some Agricultural Products Where Export Growth Has Been More Modest

(Values in $ million)

Items Exports in 2000-01 Exports in 2007-08

Tobacco 189.83 480.08

Cashew 449.99 555.35

Guargum meal 129.52 279.95

Castor oil 208.55 317.02

Processed food items 288.44 680.39

Tea 391.54 505.50

Coffee 259.36 465.26

Source: Same as Table 1.

year. Our non-basmati rice exports, however, have made the m ajor difference which did particularly well in 2007-08 with e xports of 5.1 million tonnes that year with much of our exports going to neighbouring south Asia, west Asia and Africa but following the price rise in 2008, exports were banned. Another item whose exports have grown rapidly is maize that fetched $600 million in 2007-08 as against virtually non-existent exports in 2000-01. Exports of buffalo meat have grown significantly accounting for $875 million in 2007-08. Raw and refined sugar and molasses have also gone up to $1.4 billion in 2007-08. Moreover, oil cake, particularly of soya, has acquired a prominent place in the export basket. Other promising items include fresh fruits and vegetables that contributed $726 million in 2007-08. Not only mangoes, but also fresh grapes from India have made a presence in foreign markets (grapes from Nasik are on the shelves even in the Slovene market). With demand being there, the question arises why we are not able to increase productivity in several of these agricultural items be it rice, horticulture products (even fruits like pomegranates and guavas would sell well), fresh fl owers4 or organic items?

Among plantation items, spices have performed reasonably well thanks to also some value addition in this area. Growth in exports of tea, coffee and cashew, however, have been very modest.

Marine product exports, another labour-intensive area, have also been restrained severely, thanks to the anti-dumping duties imposed on shrimps in the US market and to the multiplicity of health and other regulatory restrictions in the different EU member states. Frozen shrimps have been particularly affected with their export of $810 in 2007-08 being even marginally less than the figures in 2000-01. A consolation here is that we have made a beginning in processed shrimps exports (HS code 160520) that have quickly risen to $143 million in 2007-08.

Another agricultural item that is having an imprint on our changing trade profile is our cotton exports, which have risen sharply to $2.2 billion. This is due to the introduction of Bt cotton cultivation5 in 2002 that has allowed India, which was a net importer one year and a net exporter in another, depending on harvest, to become an established exporter. While cotton exports have reportedly fallen sharply in 2008-09 because of mismatch between significantly higher domestic prices and depressed international prices, the International Cotton Advisory Committee (ICAC) has predicted that Indian cotton exports are expected to strongly rebound in 2009-10. Another noteworthy aspect is that our raw cotton exports are largely destined to China, Pakistan and Bangladesh. It is also important to ponder why a large cotton producer with a huge textile industry should not process the c otton within the country itself rather than shipping it out in p rimary form.

A similar query could also be posed in respect of export of primary ores in which there is an eightfold increase between 2000-01 and 2007-08 with a large part of the growth coming from iron ore concentrates that are predominantly destined to the Chinese market.

Exports of leather and leather products, another traditional and labour-intensive export sector, have also grown but at a much slower pace than our overall exports resulting in its share halving in our export basket to 2.15%. India’s share in the world imports has, however, improved in all the segments of leather industry, with footwear emerging the leader in our export basket for this sector. The footwear segment has also now diversified into making full shoes (and not just shoe uppers), sandals and ladies slippers for the export market with 90% of exports going to the EU and US. India is, however, practically non-existent in the huge market for informal or sports footwear or children’s shoes, where multinational companies having production units in China or other costcompetitive production centres hold a virtual sway (China has 70% share of US footwear market). It will be interesting to watch if dereservation and the new SEZ policy will make a difference to this sector that may be tested with the footwear SEZ Park being set up in Tamil Nadu and a few other similar initiatives.

4 Imports: Sectorwise Performance

Broadly, five inter-related factors have influenced import trade during the period under review. One is the expansion taking place in the manufacturing sector that is drawing more machinery, raw materials, intermediates and accessories as imports. Second, needs of the infrastructure and transport sector including of aircrafts, ships or metro rail is increasing import expenditure. A third factor is the steadily rising internal demand for a number of commodities from fuel and fertilisers to edible oil and pulses and even cereals in some years. The increase in unit values of these and other commodities have also contributed significantly towards inflating the import bill. Finally, the liberalised import framework and the drop in tariff are allowing what one may call non-essential imports, even if they are still limited.

The top 15 sectors/items of import have, however, remained more or less the same both in 2000-01 and 2007-08, and these import figures are captured in Table 5 (p 47). While these products/sectors together covered 86% of India’s total imports in 2000-01, they accounted for almost 90% of imports, in 2007-08.

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Table 5: Imports – Sectorwise Performance6 (Value in $ million) As can be expected, a more liberal import regime invites

Rank in Principal Item/Group Imports in Imports in Per Cent Growth Rank in

i mports that give greater choice to consumers, something that

2000-01 2000-01 2007-08 2007-08/2000-01 2007-08

1 Petroleum crude and products 15,650.09 79,683.53 409 1 was severely restricted under the QR regime. Imports, therefore,

(31.32) (31.68) have grown of apples and pears, wines and spirits, toys and sports 2 Pearls, precious and semi- 4,807.66 7,980.46 66 7

equipment, paintings and furniture and motor cars but these are

precious stones (9.62) (3.17) 3 Gold and silver 4,638.04 17,875.68 285 4 still quite limited. The use of specific duties in the case of textile

(9.28) (7.11) and garment items has also been able to keep away cheap im4 Machinery and transport equipment 4,109.08 45,197.14 999 2

ports that undercut domestic producers. Furthermore, the anti

(8.22) (17.97) 5 Electronic goods 3,508.51 20,660.00 488 3 dumping mechanism has been employed by the government to

(7.02) (8.21) prevent dumping of products that can hurt the domestic industry. 6 Organic and inorganic chemicals 2,818.58 11,584.44 311 5

These have been widely used particularly in respect of chemicals

and pharmaceuticals (5.64) (4.61) 7 Edible oil 1,308.22 2,559.85 96 14 and allied products, especially those coming from China.

(2.62) (1.02) Coal, coke and briquette 6,426.83 483

8 1,103.09 9 5 Changing Trade Directions

(2.21) (2.55) 9 Professional instruments 878.84 3,068.82 249 13 India’s changing trade profile has also been accompanied by

(1.76) (1.22) some significant changes in the direction of trade. However, EU, 10 Iron and steel 777.83 8,694.45 1,017 6

if taken as one entity, and the US have continued to be India’s

(1.56) (3.46) 11 Metalliferous ores and products 774.20 7,915.90 922 8 main trading partners during the period under review. Further

(1.55) (3.15) more, the top 15 trading partners of India in 2000-01 have also 12 Fertilisers 751.84 5,408.61 619 10

continued to feature among the first 15 in 2007-08 excepting Bel

(1.5) (2.15) 13 Project goods 747.20 1,294.18 73 gium and Italy, which have got relegated from the third and 11th

(1.5) (0.51) positions to 16th and 18th. 14 Artificial resins 554.86 3,687.62 564 11

There are, however, several shifts in the rankings and changes

(1.11) (1.47) 15 Non-ferrous metals 533.83 3,507.76 556 12 in percentage shares of countries in India’s total trade, as will be

(1.07) (1.39) seen from Table 7. While the US still retains the pre-eminent posiOthers – –

tion, its share in our total trade has dropped from 13% to 10%.

(14.02) (10.33) Total 49,974.75 251,562.07 403 This is closely followed by China with a 9.15% share, having

(100) (100) Percentage shares of imports in 2000-01 and 2007-08 are given in parenthesis.

Table 6: Import Unit Value Changes for a Few Select Items

Source: Same as Table 1.

HS Code Description Import Unit Value in 2007-08

Import Unit Value in 2000-01

Petroleum products have all along taken the pre-eminent posi

151110 Crude palm oil 1.7

tion in this listing, accounting for around 30% of import value.

260300 Copper ores and concentrates 4.6 There has, however, been some churning in the ranking of other 270400 Coke 3.3 items/sectors. Imports of machinery and transport equipment 270900 Petroleum crude 2.8 m ultiplied by 10 times in these seven years to account for 18% of 310210 Urea 2.4 imports as against only 8.2% earlier. Noteworthy here is that im-710812 Gold 2.7 ports of aircrafts alone accounted for $12.33 billion in 2007-08. 721933 Cold rolled steel 1.6 Source: Same as Table 1.

Electronics goods imports, including of mobile phones, TVs and computers, too soared to cross $20 billion in 2007-08, taking the

Table 7: India’s Major Trading Partners 2000-08: Percentage Share in Total Trade

third place. The imports of chemicals and pharmaceuticals did not

Rank in 2000-01 Country 2000-01 2007-08 Rank in 2007-08

grow as fast as overall imports but still managed to climb a notch in

1 US 13.0 10.07 1

the relative ranking. Also, all other industry raw materials, viz, coal

2 UK 5.7 2.81 8

and coke, iron and steel and metallic ores, saw buoyant imports

3 Belgium 4.6 2.06 16

taking place even as their prices soared (Table 6). Imports of gold

4 Germany 3.9 3.61 6 and silver, regarded also as a form of investment and insurance in 5 Japan 3.8 2.45 10 India, also rose significantly. Some of these imports also found their 6 Switzerland 3.8 2.52 9 way into our gold and silver jewellery exports that have been grow-7 Hong Kong 3.7 2.17 11 ing. Similarly, the other major item of import for export, viz, dia-8 UAE 3.4 7.02 3 9 China 2.5 9.15 2

monds and gemstones also rose but in a much less buoyant fashion

10 Singapore 2.5 3.73 5

that has resulted in it being relegated to the seventh place.

11 Italy 2.1 1.88 18

Imports of edible oil saw a major change in that imports shifted

12 Malaysia 1.9 2.06 15

substantially from refined to crude palm and soya oil. Also, the

13 France 1.7 2.13 13

rise in unit value of edible oil during this period (1.7 times) was

14 Australia 1.5 2.16 12

less harsh than other commodities. On the other hand, fertilisers,

15 Saudi Arabia 1.5 5.57 4

the other major bulk import for domestic consumption, went up

55.6 59.39 significantly even as their unit values also climbed up. Source: Same as Table 1.

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jumped to No 2 position in 2007-08, from No 9 in 2000-01. (Trade trends already indicate that China has become India’s No 1 trading partner in 2008-09.) Furthermore, all the three following places have been taken by Asian countries, United Arab Emirates, Singapore and Saudi Arabia in that order, in 2007-08 although they figured much lower in ranking in 2000-01.

The increase in shares of several of Asian countries has also meant that India’s exports to Asia and Oceania which was only 37.56% of total exports in 2000-01, went up to 50.23% in 2007-08. In the case of India’s imports, the shift was even more dramatic, by doubling from 27.74% to 57.4% of total imports during the same period.

Seen also from the perspective of developing and developed countries, there is a significant transformation. From only a share of 43.56% of our exports going to developing countries in 2000-01, they climbed to 58.16% in 2007-08. While a majority of our imports were sourced from developing countries (57.22%) even in 2000-01, their share went up even further to 61.18% in 2007-08.

Looking at the changing trade pattern regionwise, in our own immediate neighbourhood, the case of Sri Lanka stands out with a fourteenfold increase in its exports to India and an almost fivefold increase in the reverse direction. The India-Sri Lanka Free Trade Agreement (FTA) has certainly contributed to this change. Our exports to other south Asian countries have also grown considerably during this period raising the share from 4.27% in 2000-01 to 5.90% of our total exports in 2007-08.

In the Association of South East-Asian Nations (ASEAN) region, our trade with Singapore stands out with Singapore’s exports to India multiplying by 5.6 times, while the exchanges in the reverse direction going up by a factor of 8.5. Again, the bilateral India-Singapore Comprehensive Economic Cooperation Agreement (CECA) launched in 2005 and the expectations that preceded it could be said to have contributed to this increase although it needs to be added that over 50% of our exports to Singapore in 2007-08 were refined petroleum products. Our trade with ASEAN as a whole also expanded significantly during this period to account for around 10% now. This could get a further boost once the India-ASEAN FTA is signed and implemented.

In north-east Asia, the phenomenal increase in trade vis-à-vis China has been transformational, as referred to earlier. And this is not withstanding the numerous trade defence measures that are in force in India against Chinese products as also a few antidumping duties on Indian chemical products in the Chinese market. A peculiarity about our exports to China however is that more than two-thirds of our exports are accounted for by metallic ores and raw cotton.

Korea is the other country in this region with which trade has rapidly expanded by over six times in each direction. The recent signing of the Comprehensive Economic Partnership Agreement (CEPA) could impart further momentum to belateral trade and investment flows as in the case of Singapore.

In the Gulf region, the principal country not only for our i mports of oil, but also our exports of various petroleum products has been UAE, which is also an important point for transit trade. UAE also takes in a significant share of our jewellery exports. The construction activity in the Emirates has also drawn steel and other construction material from India.

Among other developing countries, buoyancy is evident in our trade with South Africa, Brazil, Kenya and Turkey. Other destinations, relatively less in terms of volume, but showing potential, i nclude, Nigeria, Ghana, Tanzania, Mauritius, Chile, Mexico and Colombia. As a reflection of trade diversification, it is of interest to note that our exports to Africa has grown from 5.36% of our total exports in 2000-01 to 8.53% in 2007-08, while our import dependency from this region has also gone up almost twofold from 4.14% to 8.14%. The percentage shares are somewhat smaller in respect of Latin America, but here too our export shares rose from 2.22% to 3.47% and the import shares from 1.42% to 2.61%.

6 Conclusions

India’s external trade has undergone significant changes in recent years both in terms of items traded and direction. For an economy that was, and still is, punching far below its potential in external trade, this diversification of products and markets is a welcome trend. (It is hoped that the steep decline witnessed in our trade in recent months because of the ongoing economic crisis is a temporary phase.) In the coming years, import pressures can be expected to only further strain the widening trade deficit. Not only the five interrelated factors mentioned in Section 4 that are behind our rising imports, but also the liberalised market access for ASEAN, Japan or Korea, which will soon be our new FTA partners as also EU, if the broad based Trade and Investment Agreement under negotiations gets to be quickly concluded, would see a steadily rising import bill. It is, therefore, imperative that our exports keep pace. Judging from the performance in recent years outlined earlier, this should be feasible.

Kumar and Gupta (2008) have pointed out the need for clearly identifying and building upon comparative or competitive a dvantages for improving our manufacturing exports. As pointed out in Section 3, there are several products such as diamondstudded jewellery, forgings and castings, wind turbines and automotive parts and pharmaceuticals to mention, but a few, where our manufacturing exports have made forays. The Eleventh Five-Year Plan (2007-12) document has, in chapter 13 on “External E nvironment”, also examined the manufacturing sector’s r esponse to the high transaction costs involved and noted:

The more innovative entrepreneurs have focused on niche export markets by adopting technology to replace large number of unskilled labour with fewer semi skilled workers. This has happened in conventional labour intensive sectors such as automobiles (components) and chemicals. Manufacturing has therefore developed some comparative advantage in what may be termed relatively skilled labour intensive manufacturing.

The question then is, is there a way to encourage these exports to develop and establish themselves further? Success on this front could also help to project India’s emerging prowess in skill-intensive industry sectors and help build some space for “brand India”.

The second aspect is to look at the labour-intensive export sectors, particularly textiles, leather goods and a whole array of light industries that have now been dereserved. These can by no means be sunset sectors for India. Textiles, for example, may have come down in ranking to No 5 in our export basket, but it may actually be holding No 2 position, if local content is taken as the key

august 29, 2009 vol xliv no 35

SPECIAL ARTICLE

c onsideration. The potential for these sectors to contribute to ex-the first quarter of 2009-10 which saw a negative growth of 31.3%. ports are still huge, if only some of the constraints standing in their The downtrend in imports set in somewhat later from January way can be removed. Arvind Panagariya in his book India: The 2009 onwards. Total imports during the second half of 2008-09 Emerging Giant has in the chapter on “International Trade” given a ended being 5% less compared to figures for the corresponding comparative account of the composition of merchandise exports of period in 2007-08. Imports also fell more steeply by 36.5% in the India and China and pointed to the variety of policy imposed con-first quarter of 2009-10. The decline in both exports and imports straints that have come in the way of India exploiting its huge com-in the first half of calendar year 2009 look somewhat pronounced parative advantage in unskilled labour-intensive manufactures. because of high oil prices during the corresponding period in 2008 This is also examined in the “External Environment” chapter of the that resulted in inflating import and export figures then. Even so, Eleventh Five-Year Plan document, which has referred to the dis-the fact is there has been a significant contraction in trade and tortions created by “inappropriate labour laws and cumbersome practically all sectors have borne the brunt with some getting more and pointless rules and procedures” and the “often high transac-affected than others. We may need to, however, await the arrival tion cost of implementing the laws and the losses imposed by la-of disaggregated data for recent months to get more insight into bour inflexibilities when demand falls”. There is, therefore, an ur-how the different sectors and markets fared in this difficult period. gent need to appropriately address labour rigidities apart from, of Such sharp declines, however, have also been experienced not course, improving our infrastructure, for providing a strong impe-only in India, but also in most other countries. tus for export from these labour-intensive sectors to grow. There is much speculation about when there will be a return to

A third aspect is the huge potential in agricultural exports, be it normalcy and demand will pick up again. Opinions have also of rice or cotton or spices or fruits and flowers or vegetables. This been voiced that consumer spending, particularly in a market is apart from processed food exports which are meeting a growing like US, may never be the same again and there could be strucdemand, especially from among the overseas Indian community. tural shifts. We will need to wait and see. What would be impor-Increasing the productivity of agricultural export items and im-tant is to ensure that our exporters do not lose market shares, proving the special infrastructure needed for their preservation even if the cake of world trade has become smaller. As we have and transport in order that we engage as established exporters do seen, adverse impact on our exporters during a recession can seem, if experience during recent years is an indication, within our arise not only from depressed demand, but also because of adreach. An attractive aspect is also that our agricultural exports go verse exchange rate movements and related anomalies or beto a wide variety of destinations, many of which are developing cause their competitors are given better incentives (and stimulus countries that are potentially expanding markets. packages) by their home governments to overcome the impact of

Success on the afore-mentioned aspects can come about over a the crisis or because of certain vulnerabilities in particular secmedium-term if actions are quickly initiated. Meanwhile, there is tors. Clearly, these will need supportive measures. Once ecoalso the urgent need to address the sharp decline in India’s exter-nomic revival begins, as it is bound to sooner or later, our exportnal trade in recent months. The downtrend in exports started in ing community should seek to quickly claw back to pre-crisis October 2008 and registered a decline of 18.6% in dollar terms trade levels and get on to the task of further consolidating the during the second half of 2008-09. It has further worsened during gains in India’s changing trade profile.

Notes

1 All the trade figures used in the paper have been taken from System on Foreign Trade Performance Analysis (FTPA), Export-Import Data Bank and press releases on India’s Foreign Trade, all of which are accessible under the heading “Trade Statistics: in the web site of the Department of Commerce of government of India (http://commerce.nic.in/).

2 The paper by T N Srinivasan and Vani Archana (2009), inter alia, examines the determinants surrounding a firm’s decision to export in the I ndian context and has found that a large share of the surveyed firms never exported even among labour-intensive industries and that their incidence was relatively more when the survey covered all manufacturing firms and not just firms in labour-intensive sectors. The paper also found that exporting firms were significantly larger, more R&D-intensive, and more profitable than non-exporting firms.

3 The paper by Reji K Joseph (2009), on “Estimating the Trade in Drugs and Pharmaceuticals” has gone into the definitional aspects of what products need to come under the purview of “Drugs and Pharmaceuticals” and has also examined the balance of trade in these wider group of items (not just items under HS code 30 which covers pharmaceutical products, but also under HS codes 28 and 29 that cover inorganic and organic c hemicals, respectively), which it finds to be negative and growing. Insofar as its relevance to the current paper is concerned, while this does raise a question about the extent of value addition in our pharma exports, wherever there are imports made for exports manufacture, it still does not take away the vast role this sector has played in the redrawing of our export profile during the p eriod under review.

4 A news item by Bhattacharya (2009), “Why Kenya Beats India in Flower Power”, examines why after a good start flower exports have declined.

5 A recent article by Kavitha Kuruganti (2009), from the Coalition for a GM-Free India, titled “Bt cotton and the Myth of Enhanced Yields” contests that higher yields are due to Bt cultivation and points to other possible reasons.

6 These are the top 15 items of imports taken from the System of FTPA of the Department of Commerce of GOI.

References

Bhattacharya, Amit (2009): “Why Kenya Beats India in Flower Power: After Good Start Flower Exports Slide”, Times of India, New Delhi, 7 May.

Joseph, Reji K (2009): “Estimating the Trade in Drugs and Pharmaceuticals”, Economic & Political Weekly, Vol 44, No 2, 10 January.

Kumar, Rajiv and Abhijit Sen Gupta (2008): “Towards a Competitive Manufacturing Sector”, Working Paper No 203 (New Delhi: Indian Council for R esearch on International Economic Relations).

Kumar, Rajiv and Amitendu Palit (2007): “Has the Fuel Run Out of India’s Exports”, Business S tandard, 26 February.

Kuruganti, Kavitha (2009): “Bt Cotton and the Myth of Enhanced Yields”, Economic & Political Weekly, Vol 44, No 22, 30 May.

Panagariya, Arvind (2008): India: The Emerging Giant (New Delhi: Oxford University Press).

Srinivasan, T N and Vani Archana (2009): “India in the Global and Regional Trade: Determinants of Aggregate and Bilateral Trade Flows and Firm’s Decision to Export”, Working Paper No 232 (New Delhi: Indian Council for Research on International Economic Relations).

Economic Surveys (2000-01 to 2007-08): Government of India accessible at http://finmin.nic.in

Eleventh Five-Year Plan (2007-12): Chapter 13 of Volume I on Inclusive Growth titled “External Environment, Challenges and Risks” accessible at http://planningcommission.nic.in

Export-Import Data Bank of the Development of Commerce of Government of India that is accessible at web site http://commerce.nic.in

India Export Services (2008): “Sectoral Analysis prepared by Confederation of Indian Industry”, April, accessible at web site http://www.cii.nic.in

Economic & Political Weekly

EPW
august 29, 2009 vol xliv no 35

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