Foreign trade is a key source for economic growth for any country. Availability of necessary inputs for domestic industrialisation, proper use of resource allocation, expansion of internal industries by supplying goods in other countries have always been some crucial activities for economic prosperity. Appropriately structured foreign trade policies of any country can definitely help them to achieve the desirable level of economic growth.
History of India’s trade activities
The history of Indian foreign trade had always been outstanding especially in the pre-British era. The excellent pieces of Indian handicraft products like Shawls, Silk sarees, Carpet, Muslin, artistic carving on wooden, glass, marble, metal, ivory etc, precious stones, agricultural production like Indigo and versatile range of spices like cinnamon, pepper, opium etc. and many more things were widely popular across the different regions of world.
During the British era, India was mainly treated as a raw materials supplier to only Britain and few other commonwealth countries. Besides, India was forced to become the importer of woollen clothes, machineries and other manufactured articles by their rulers. Entry of such goods from the foreign countries used to hinder the industrialization in India and affected the growth of domestic cottage industry.
Being exposed under the British rule for a long time, the independent era of India started with an economically weak condition in 1947. The low reserve of the country forced to reduce its import bills but the scarcity of the domestic resources like food grains, raw materials and developed industrial machineries for strengthening the infrastructural capabilities were also high. The rising import values triggered the importance of encouraging domestic production for the expansion of export sector. Hence, the country was found to be in dilemma and alternated between liberation and tighter control multiple times.
Instead of smooth trade connectivity with rest of the world, government chose the process of import substitution with some strong policies on protectionism which slowed down the effect of globalization in the country. Complex regulations and licensing in the industrial fields and trade functions, stricter rules for the outsiders to join and invest in the Indian business, political instability, wars and many more incidents stagnated the growth of the country for decades.
The situation worsened with the collapse of Soviet Union and the outbreak of gulf war in 1990 which caused major imbalances in balance of payment leading to severe economic crisis. The serious condition of monetary and fiscal uncertainties left no other choice but to take loans from the International Monetary Fund (IMF). The negotiation with IMF came up with the condition of introduction of reforms in the country. For restoring growth of India, economic measures based on Liberalisation, Privatisation and Globalisation (LPG) was launched in 1991 for the all-round development. Removal of price controls, initiation of fiscal reforms, restructuring of public sector de-licensing of domestic industry, reduction in the import duties were some examples of the initial moves towards liberalisation.
he effect of these policies can clearly be understood from the following charts, where the expansion of Indian trade between 1950s to the current period are clearly visible.
Table 1: Growth Value of Indian trade at Compound Annual Growth Rate (CAGR)
Table 2: Growth of India’s Share in Global Trade between 2001 to 2018
As an importer and exporter, India was in 10th and 18th position respectively in the world trade market in 2018. Moreover, the contribution of trade in Indian GDP also grew from 26.9% to 43.13% between 2001 to 2018 (Exhibit – 3).
The Current Trade Scenario in India:
Between 2001 to 2018, the Indian import and export values have increased at the CAGR of 14.52% and 12.46% respectively. The Year on Year (Y-o-Y) growth of the import value has been maximum between 2007 to 2018 with 44.39% whereas in case of export value it was the highest between 2010 to 2011 with 36.78%.
Mineral fuels and oils, Various types of electrical machineries and mechanical appliances etc. form the major share in the overall import of India.
Table 3: Significant Growth of a Few Imported products to India between 2001 to 2018
Besides, as an exporter, the supply of precious and semi-precious stones, pharmaceutical products, cotton, iron & steel etc. have always been significant.
Table 4: Significant Growth of a Few Exported products from India between 2001 to 2018
The glimpses of top 10 traded products of India in both the export and import sectors in 2018 have been described in the following charts (Exhibit – 5)
However, in recent time, a downturn can be seen in both the Indian imports and exports. What are the reasons behind such trade slowdown?
Between October’17 to October’19, the Indian import and export have risen at CAGR of 8.83% and 26.01% respectively. However, if we look at the Month – on – Month growth rate, then a deceleration can be seen in both these parameters of Indian trade. Both the import and export sector started the journey of 2019 with -2.11% and -5.2% growth rate respectively. For most of the time this year, they faced negative growth.
After experiencing a mild growth in August’19, the import sector again found to be declining with the rate of -5.36% in Sept’19 and the trend continued in the next months. Similarly, after a modest rise in Jul’19, th export sector also started to experience falling value in the following months and ended up in Oct’19 with a growth of 0.64%.
Major decline in the exports of fish, meat, coffee, tea and spices, cocoa; raw hides, leather articles, silk, precious and semi-precious stones, iron and steel, organic and inorganic chemicals, fertilisers, perfumes, cosmetics and essential oils etc. are said to be some serious reasons behind the downward movement of exports.
However, the import is also declining. Drop in the import of some of the major items like dairy and poultry products, cereals, oil seeds, miscellaneous edible preparations, various categories of chemical products, fur skins and artificial furs, paper and related products, books, cotton and woollen products, railway or tramway locomotives, electrical machineries and appliances, vehicles and multiple types of vehicular parts, preparations of fish and meat, tanning or dying extracts etc. are responsible to drag the rate of import growth lower.
Falling trend of the both the trade indicators have helped to reduce the trade deficit in some extent. Between Oct’17 to Oct’19, the trade deficit has decreased at a CAGR of 18.07% in India. Moreover, the trade deficit which used to be INR 1.1 trillion has reduced to INR 779 Billion in Oct’19.
Reasons behind such downward trade movement:
- Prolonged trade wars, increasing geo-political tensions leading to complex trade barriers, depressed global crude oil prices, stagnated economic condition in several emerging markets have downgraded the global trade growth. Besides, imposition of higher tariffs and multiple complex trade policies of India along with the stated factors are some crucial reasons behind the falling import activities of the country.
- Besides, the Indian economy is facing a tough economic situation currently. Collapse of pivotal financial entities, series of bankruptcies of influential businesses, rising non -performing assets of the scheduled commercial banks leading to liquidity crunch have caused serious hindrances in the flow of money in the economy. It has ceased or reduced the regular and smooth operation of the key sectors like automobile, real estate, agriculture, financial services etc. Hence, the manufacturing activities and overall industrial production have fallen significantly in the economy. Shutting down of businesses in the informal and formal sectors have increased the unemployment and curtailed the consumer demand majorly in the rural sector. Hence, the overall production scenario has deteriorated in the country which also seems to affect the export sector.
Not only in India but the escalated trade tensions among the major economies have also lowered the trade growth. According to the latest forecast by World Trade Organization (WTO), only 1.2% of merchandise trade is now expected to rise by the end of 2019.
Amidst such economic uncertainties the thing which has been highlighted in the last few days is India opting out of RCEP. Now, what is RCEP?
RCEP or Regional Comprehensive Economic Partnership is a proposed Free Trade Agreement (FTA) in the Asia Pacific region between the 10 countries from Association of Southeast Asian Nations (ASEAN) which are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam and their five major FTA partners Australia, China, Japan, New Zealand, and South Korea. The mega trade deal started in 2012 with 16 countries but India, ASEAN’s sixth FTA partner opted out in 2019.
Is the RCEP helpful for the participating countries?
- RCEP is a comprehensive trade agreement covering trade in goods and services, economic and technical cooperation, investment, intellectual property, competition, e-commerce (digital trade), government procurement, dispute settlement/legal and institutional issues.
- The main agenda of the trade group lies in offering opportunities to its participating countries to strengthen the existing free trade agreements with the other RCEP participants. This trade group policies encourage trade by lowering tariffs, standardizing customs rules and regulations, and widening market accessibility.
- Proper implementation of all the approaches in this trade pact are capable to generate jobs, bring sustainable growth and promote innovation, which ultimately boosts the standard of living of the citizens of the participating countries.
With such mentioned features, RCEP plans to cover one-third of the world economy and half of its population.
Why India opted out of RCEP?
After being a part of RCEP for 7 years, India opted out of the powerful trade pact in 2019 citing the reasons that following the guiding principles of RCEP would actually hurt the national interest of India.
- India’s trade deficit has boomed drastically in the last few years. Between 2001 to 2018, the trade deficit has increased at a CAGR of 44%. However, the role of the RCEP participants in the trade deficit hike is also significant. The RCEP trade agreement was launched in November, 2012 and between 2013 to 2018, the India’s trade deficit with RCEP countries has increased at a CAGR of 12.74%.
- In 2018, India had a trade deficit of around US$ 108 billion with the RCEP countries. The share of China in the deficit was maximum with 85%. Out of 15 Countries, India had negative trade balance with 11 countries. The scenario of India’s trade deficit with the RCEP countries are described in the following chart.
- Under the beneficial tariff policies for all the countries in the RCEP, India seemed to face drastic trade deficit with the trade group. Presence of the participating countries’ industrial and agricultural goods increased in our country. It might be their marketing policies, cheap price, quality of the products or versatility which triggered the domestic demand but the domestic producers faced losses due to increasing consumption of such foreign products in the domestic market.
- Besides, the trade agreement became damaging to the government’s “Make in India” initiative when the flood of imports of intermediate and final goods made seemed to wipe out the domestic products.
- In a few cases, ineffective negotiations of FTAs also harmed the Indian industry leading to huge trade deficit.
Hence, requirement of a specific protection was urged for the domestic industries and farmers from the rapid hike in foreign imports. The Indian manufacturing industry and dairy farmers have been a long-term victim of this. The Chinese manufactured good and dairy products from New Zealand had flooded the market for years.
How India is going to be affected for quitting the RCEP trade pact?
After India’s quitting from RCEP, fifteen other nations in the trade pact has decided to move on, keeping the door open for India. Apart from RCEP group, India already has bilateral trade agreements with Singapore, Thailand, Malaysia, South Korea and Japan as well as another FTA with ASEAN. So, India’s connectivity with these all countries would not change.
- However, India’s withdrawal from RCEP is also considered as a huge loss. By withdrawing its participation, India actually has excluded itself from the largest trade bloc of the world which covers nearly half of the world’s population and nearly 30% of global GDP.
- As discussed earlier, India was in a growth stagnation during 1960-85 which was highly caused by the country’s protectionist moves. The average growth rate between 1960 to 1970 was 1% to 3%. However, since the beginning of India’s trade reform in 1991, the economic growth has been 6% per year in 18 of the last 29 years. Hence, restricted trade activities might affect country’s growth.
- Being the 2nd largest populated country in the world with the 42% share of youth in it, India has a comparative advantage in the services sector (e.g. Information Technology, Health, Education and many more) with abundant supply of labours. Thus, RCEP was capable to create opportunities for Indian companies to access new markets which now might be reduced.
- As a part of RCEP, India had the diplomatic advantage with other Asia- Pacific nations which helped to enhance the economic status of the country. Now, after the exit from the pact, any Indian exports to these markets will be subjected to a higher tariff for not being a part of RCEP.
- The fragmented export sectors, interest of the exporters of using the normal route, stricter norms for implementation and lack of awareness hinder the smooth export activities of the country. According to a report, India’s FTA (Free Trade Agreement) utilization rate is less than 25% which is lowest in Asia.
- It is also been believed that India’s upcoming trade pacts with United States and European Union might be a reason for leaving the RCEP. India’s share of trade with the North American Free Trade Agreement (NAFTA) along with the ASEAN have increased significantly over the years. Between 2001 to 2018, India’s export to NAFTA and ASEAN have increased at the CAGR of 15% and 13.54% respectively. Moreover, the imports from NAFTA and ASEAN in India have also grown at the CAGR of 13.58% and 13.4% respectively.
Recommendations:
India need to improve on the following areas for a more competitive trade participation:
- Effective negotiation policies
- Manufacturing capabilities
- Boosting the production of better quality of goods at competitive prices.
- Increasing the focus on innovation and research.
- Effective promotion of all types of domestic industries globally.
Though India’s decision for leaving the RCEP has been regarded as a protectionist step of the country however it is hoped that during this trade restriction period, the affected industries will get the time to recover. Besides, with initiation and execution of suitable reforms in all the required cases, the country will also become stronger to deal with international competition and able to join back the crucial trade bloc in order to access the diversified market.