Structure of Answer:

1. Introduction- brief note on India’s trade liberalisation (30 words)
2. Discuss the changes seen in trade trends and the reason behind it ( 60 words)
3. Current global environment and its impact on India’s trade (40 words)     
4. A note on measures to address the trade situation of India (30 words)

Your Answer should contain the following 3 points (use some data given below to substantiate you answer)

1. Expansion of trade
2. Diversification of trade
3. Structural shift in trade basket

• Over the last 25 years since India’s liberalisation, its foreign trade has expanded multifold and seen significant structural shifts in product as well as geographic composition.
• The easing of quantitative restrictions as well as significant reduction in tariff levels across product lines has aided the growth of foreign trade in the first two decades post In-fact, the share of foreign trade (both exports and imports) in India’s GDP stood at over 43 percent during 2011-13 as against 13 -15 percent during early nineties.

However, over the last few years there has been a marked deceleration in India’s foreign trade, both exports as well as imports, primarily on account of subdued global demand and dip in global commodity prices.

Analysis of India’s foreign trade trends:

Significant expansion in trade over two and a half decades

• During the last 25 years, India’s exports have increased more than 17 times, from US$18.1 billion in 1990- 91 to US$ 309 billion in 2014-15, and India’s imports have increased 19 times, from US$ 23.5 billion in 1990-91 to US$ 447 billion in 2014-15.
• India’s share in global exports has moved up from mere 6 percent in early nineties to 1.7 percent currently.
• Likewise, India’s share in global imports has increased from around 6 percent during early nineties to 2.4 percent currently.

In the first decade of this period (1990-91 to 1999-2000), India’s exports grew at 8.1 percent and imports at 8.7 percent. The real surge was witnessed in the next decade (2000-01 to 2009- 10), when exports grew at 16.8 percent and imports at 21.5 percent annually. This trend continued until 2011-12, after which there has been a steady decline in trade owing to global slowdown. In 2014-15, exports dipped by 1.8 percent while imports dipped by 0.4 percent. For the first 11 months in financial year 2015-16, exports as well as imports have seen a sharp decline.

Exports are now more diversified geographically

•  During the initial period of liberalisation, India’s exports were less diversified, with top 20 countries accounting for more than 80 percent of India’s total exports
• During 1991-92, USA was the largest export destination (16.4% share), followed by Japan (9.2%), Russia (9.2%) and some European countries
• Today, top 20 export destinations for India account for 67 percent of total exports, reflecting greater diversification
• While USA remains the largest export destination, its share has come down to 13.7 UAE has emerged as second largest export destination accounting for 10.7 percent share, while Hong Kong is the third largest destination with a share of 4.4 percent.
• The most significant change in the direction of India’s exports during post-liberalisation era has been the increasing share of developing countries and falling share of advanced and developed economies.
• Between 1990-91 and 2014-15, the share of Asia has increased from 34 percent to 49 percent and that of Africa from 3 percent to 11 percent. On the other hand, share of Europe has come down from 41 percent to 19 percent during this period

Structural shift seen in exports basket with greater contribution of value-added products

• The composition of exports has gone substantial changes since liberalization
• There is a structural shift in India’s exports, away from primary, agricultural and traditional exports like textiles towards more value added manufactured and technology-based items such as engineering goods, refinery products, pharmaceuticals, etc
• Overall, India’s export basket is now diversified with non-traditional items and differential products are also gaining importance

Recent export trends for major commodities

1. Engineering Goods: India’s top export item is Engineering goods, accounting for 22.5 percent in India’s total exports in 2014-15. Within this category, some of the prominent export items are Transport Equipment (including Automobiles and Auto components), Iron and Steel and Machinery & Instruments. Sri Lanka’s automotive market has been one of the fastest growing vehicle markets in the world. India in fact dominates the Sri Lankan market for vehicle imports. In September 2015, Sri Lanka changed the basis on which customs calculates the value of certain motor vehicles, due to which imported vehicles are expected to become costly. It has been estimated that Sri Lanka's vehicle imports could drop by 90 percent, implying significant reduction in India’s vehicle exports to Sri Lanka going ahead.
2. Petroleum products: India’s refining capacity increased significantly since 2001-02, due to which India turned a net exporter of petroleum refinery products and this category has lately emerged as the largest item in India’s export basket. Petroleum products had a share of 4.3 percent in India’s total exports in 2000-01, which then rose steadily to a high of 20.1 percent in 2013-14, before falling to 18.3 percent in 2014-15. The decline in global oil prices has severely affected India’s exports of petroleum products. Global oil prices are expected to remain low in 2017 making it difficult and challenging for India’s exports of petroleum products.
3. Chemicals and chemical products: An important export item that has performed reasonably well over the last two years is Chemicals and chemical products, which account for 4 percent share in India’s total exports (2014-15). Under Chemicals sector, drugs and pharmaceuticals are the largest export category accounting for 47.7 percent share. This is one sector where India is highly competitive on both quality and pricing front and has emerged as a global hub for pharma production. However, recently the US government has made it mandatory for Active Pharmaceutical Ingredients (APIs) to be manufactured locally, which will hurt Indian exporters significantly. The Indian government should thus take up this issue with US authorities and resolve it at the earliest.
4. Gems & Jewellery: Gems and jewellery is one of the major contributors of export earnings for India, having a share of 13.3 percent in India’s merchandise exports in 2014-15. Geographically, the exports of gems and jewellery are highly concentrated, with top 3 markets UAE, Hong Kong and USA together accounting for almost 80 percent of total exports. Over the last few years, gems and jewellery exports of India have been adversely affected by the global slowdown as luxury demand in overseas market has seen a sharp decline. Additionally, Indian exporters of gems & jewellery have been facing stiff competition from Chinese exporters in these markets. Given the global economic uncertainties, gems & jewellery exporters could continue to face challenging times.

5. Textiles and Readymade Garments: Textiles and garments exports together account for 11.3 percent of India’s exports (2014-15). In-fact, India is one of the leading exporting countries of textiles and garments in the world. The US remains the single largest export destination. The exports of both textiles and garments witnessed good performance between 2010-11 and 2014-15. However, the muted global demand last year has led to a marked slowdown in exports growth of both textiles and garments.

Trends in imports

•  POL (petroleum) has always remained the most important item of import in India’s trade in the pre as well as post reform period
• It had a share of 27 percent in total imports in 1991-92, which currently stands at around 31 percent (2014-15).
• With a sharp decline in global crude prices, India’s imports (in value terms) of POL have come down significantly. This has helped India in narrowing the trade deficit and also kept current account deficit largely under control.
• Gold is the second most important import item after crude
• The data shows that significant drop was observed in gold imports, primarily due to fall in the international gold prices and various policy measures taken by the government to curb gold imports. The government had increased customs duty on gold to 10 percent and banned import of gold coins and medallions to reduce its ballooning current account deficit

Trade outlook

•  WTO, in its latest release said For 2017, global trade is expected to grow at 3.6 percent, but it is below the yearly average of 5 percent since 1990
• With such muted growth prospects, recovery in India’s exports becomes extremely The way forward is to strive towards greater competitiveness, which in turn would require a strong policy push.
• Additionally, under the various Free Trade Agreements that are currently being negotiated, the government should aim at achieving significant market access for Indian exporters

How to address the negative trend:

Some of the thrust areas identified to push exports include reviving SEZs and according priority sector status to export credit, promoting organic produce, MSMEs, involving missions and embassies to promote trade and removing issues of EXIM bank and Export Credit Guarantee Corporation (ECGC).