Foreign Trade was adopted by government to protect domestic industries : Tariffs (taxes), Quotas (limit restrictions)
Overview
- Covers all the exports and imports from and to India.
- Policy of import substitution was adopted
- Also known as inward looking trade policy
- Aim was to protect domestic industries from foreign competition
- 2 main objectives- saving foreign exchange and self-reliance
Context of international trade
- Based on specialization
- Specialisations means lower cost
- Increases size of markets
- Increases opportunities of investments
- Increase in growth rate
India’s foreign trade at independence
- Exploited by British government
- Our natural resources were their raw material
- They were importing finished goods
- Drain of wealth
- Decrease in handicraft and small scale industries
- Maximum trade was restricted due to British government
- India was just a market for them
- Uni-directional trade
- Monopoly control by Britishers
- Suez canal
- Balance of payment was favourable
Gains from foreign trade
- International specialisation
- Increased size of markets
- Increase in availability of choices
- Increase in quality of goods
- Increase in opportunities of investments
- Means of earning foreign exchange
- Serves as the engine of growth
- Promotes quality of life
- Expands trading opportunities
- Economies of scale
- Transfer of technology
- More job creation
Why foreign trade?
- Diversity in natural Resources
- Difference in tastes
- Difference in cost of production
- Price of products
- Availability of products
- Demand
Criticism of foreign trade
- Cost of trade
- External cost of trade (environment tax etc)
- Diminishing return
- Dutch disease
- Complexity of global trade
- Overdependence
- Unfair to new companies
- Threat to National security
- Pressure on natural resources
Talk about absolute and comparative cost advantage (also BOP & X-M)
Top exports from India
- petroleum products
- precious and semi-precious stones
- drug formulations
- biologicals
- gold and other metal jewellery
- iron and steel
- edible oils
- chemicals
- food grains
- fertilizers
Top imports to India
- crude petroleum
- gold
- petroleum products
- Coal
- Coke and briquettes
- light machinery
Types of foreign trade
- Import Trade
- Export trade
- Entrepot trade (purchasing and then selling)
Role of foreign trade
- Stability in price level
- Optimum utilisation and allocation of resources
- Division of labour and specialisations
- Availability of multiple choices
- Brings reputation and helps earn goodwill
- Encourages investments
- To earn forex
- Generates employment
- Improved quality of products
Main features of composition of India’s foreign trade
- Increasing share of gross national income
- Increase in volume and value of trade
- Change in composition of exports
- Change in composition of imports
- Oceanic trade
- Development of new ports
Problems of India’s foreign trade
- Adverse balance of payment
- Rapid increase in imports
- Lower growth in exports
- Increase in domestic demands
- Increase in foreign debt
- Growth of inefficient public monopolies
Need for import substitution
- Scarcity of forex
- Unfavourable balance of payment
- Devaluation of rupee
- Shortage of essential commodities
Causes of trade deficit in India
- Rising imports- large increase in developmental imports, large size in imports of petroleum
- Modest growth of exports- disintegration of USSR, low world demand, import restriction in foreign countries
- Cost and quality- high cost, low quality, growing competition
Measures to correct deficit in balance of trade
- Import substitution and restriction
- Licensing of imports
- Tariff restrictions
- Quantitative restrictions (quota)
- Export promotion
- Setting up export processing zones
- Devaluation of currency in 1991
- Income tax concession to exporters
- Setting up ex-im Bank
India’s economic crisis (1991)
Reasons
- Policy of import substitutions
- Licence Raj (red tapism and corruption)
- No to FDIs
- Sick PSUs
- Populist policies
- Global situation (gulf crisis, increased prices of crude oil)
All of the above factors led to “twin deficit“:
- High fiscal deficit (government debt increased)
- High current account deficit (imports where high as compared to exports)
Also Read Foreign Trade Policy
Refer Economics Important Topics for more other such topics