Patterns of trade

South-south exchange matters most

The patterns of India’s foreign trade have changed in the past three decades. Exchange with emerging markets and developing countries has expanded spectacularly. India’s imports, however, have expanded faster than the exports, so balance-of-payments problems may make the economy vulnerable.
Pharmacy in Bangalore: Indian drugs are appreciated at home and internationally. Lineair Pharmacy in Bangalore: Indian drugs are appreciated at home and internationally.

From independence in 1947 to the early 1990s, India was basically a closed economy that was governed according to socialist principles. Liberalisation began in the 1980s and then accelerated in the early 1990s. A balance of payment crisis forced the government to lend from the International Monetary Fund and the World Bank. The international financial institutions forced it to introduce reforms. Manmohan Singh, then the finance minister, used the opportunity to entrench liberal principles in economic policymaking (see interview with Salman Anees Soz in Focus section of D+C/E+Z e-Paper 2018/08).

Today, the formerly state-run economy is largely driven by market dynamics. This is true of India’s foreign trade. India was a founding member of the World Trade Organization (WTO) in 1995, and had previously been involved in the General Agreement on Tariffs and Trade (GATT), which ultimately spawned the WTO. India is in favour of a multilateral trade regime.

The patterns of India’s foreign trade have changed considerably since the early 1990s. From the financial year 1990/91 to the one of 2017/18, the total value of goods exports increased more than 16 times: from $18 billion to over $300 billion. During the same time span, goods imports increased almost 20 times: from $ 24 billion to more than $ 460 billion.

In the export basket, there is a noticeable shift away from traditional sectors such as textiles and agricultural commodities. The share of engineering goods has increased from 12 % to 28 %. India has also become the pharmacy of the world, exporting medically important drugs (see Deepak Sapra in Focus section of D+C/E+Z e-Paper 2016/02). Moreover, it is now the world’s back-office because companies from rich nations have outsourced business processes and other IT-intensive and knowledge-based operations to Indian partners. The revenues from such services bolster India’s balance of payments, and so do migrants’ remittances, but they do not show up in the merchandise trade statistics.

By contrast, change has been less pronounced in regard to what kind of goods India imports. Oil still accounts for 20 % to 35 % of the total import expenditure every year, depending on whether the volatile oil price is high or low.

Change has, however, been evident in countries which India trades with. In the past nine financial years, two groups of countries each accounted for about 30 % of India’s exports: the industrialised nations of the OECD (Organisation for Economic Co-operation and Development) and the emerging markets of OPEC (Organization of Petroleum Exporting Countries).

Three decades ago, by contrast, almost 60 % of India’s imports came from the OECD countries, and only 15 % from OPEC. In those days, about eight percent of the imports came from Eastern Europe, and 18 % came from developing countries. The respective ratios today are a mere two percent for Eastern Europe and a stunning 37 % for developing countries. Quite obviously, the collapse of the Soviet Union dominated Eastern bloc matters in this context. Imports from developing countries, on the other hand, include commodities from least developed countries as well as manufactured goods from China and other rising economic powers.

The export scenario has changed as well. The OECD share has dropped from 57 % to 36 %, while the OPEC share has increased from six percent to 19 %. Developing countries used to buy 16 % of Indian exports, but that figure has risen to 42 %. By contrast, Eastern Europe’s share has declined from almost 18 % to one percent. It is evident, therefore, that India’s foreign trade is increasingly geared towards south-south exchange.

Strengths and weaknesses

Foreign trade certainly makes a difference in India’s economic affairs. In the past 10 years, however, India’s GDP expanded faster than its international trade did. The value of trade peaked at almost 46 % of GDP in the fiscal year 2012/13, but has since declined to about 30 % in 2017/18. The background is that India’s economy was neither hit hard by the global financial crisis that started in 2008 nor by the slowdown of emerging markets in more recent years. Domestic growth stayed strong when the global economy weakened.

It is worth pointing out that the official statistics make foreign trade look more important than it actually is. The reason is that masses of Indians depend on small-scale agriculture, a large share of which consists of subsistence farming. It means that foreign trade has not really made a dent in mass poverty.

About 90 % of the people still depend on small-scale agriculture and/or employment in the informal sector. While India has some high-technology industries that are internationally successful, they do create livelihoods for hundreds of millions of people (see Aditi Roy Ghatak in Focus section of D+C/E+Z e-Paper 2018/10). Compared with China’s stunning economic success, Indian development is disappointing (see box).

Another downside is India’s persistent trade and current-account deficits. They indicate that the economy is vulnerable to external shocks.

We are living in turbulent times. Predicting the future has become even harder than it was a few years ago. So far, India’s foreign trade has mostly relied on WTO rules. However, the WTO increasingly looks like a toothless tiger. There are several reasons, including the following:

  • The WTO has not made much progress on concluding multilateral trade deals since 2001.
  • Its dispute-settlement system has been weakened, and tariff-wars have begun to escalate.
  • The proliferation of regional and bilateral trade deals has made the global trade landscape confusingly complex.

India’s government has engaged in bilateral trade talks and concluded some deals, especially with Asian partners. Nonetheless, India has not been particularly active in this field, and has basically kept endorsing the multilateral approach. It is hard to tell what impact the ongoing China-US tariff dispute will have. To some extent, India may benefit if rising tariffs make some Chinese producers lose their competitiveness internationally, but on the other hand, India may suffer if the global economy slows down and international supply chains are disrupted.

Praveen Jha is a professor of economics at Jawaharlal Nehru University in New Delhi.

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