UNIT 13 INDIA'S FOREIGN TRADE

Structure
13.0 Objectives
33.1 ln~roduction
13.2 Inlportaiice ol' Foreign Trade
13.3 Trends in India's Foreign Trade
13.4 Colllpositioli of Foreign Trade
13.4.1 Composition of Exports
13.4.2 Cotnposilion of Imports
13.5 Direction of Foreign Trade.
13.5.1 Ilirection of Export.9
13.5.2 Dkcclion of Imports
13.6 Regulation of Foreigil Trade
13.7 Export Pron~otionMeasures
13.7.1 Facilities for Creation of Production Base
13.7.2 Facilities by Creating Special Stslus
13.7.3 Fiscal I~lcentives-
13.7.4 Market Developlllent qssista~~ce
113.8 Lct Us Sum Up
13.9 Key Words
13.10 Answcrs lo Check Your Progress
13.11 Tcrminal Questions

13.0 OBJECTIVES
AStcr sludyillg this unit, you shouId be able to:
e describe the in~portanceof foreign trade
e disci~ssthe trends in India's foreign trade
e explain the coillpositioil of lbreign trade
o ailalyse h e direction or foreign trade
s discuss the export promotion measures.

13.1 INTRODUCTION
Foreign Lrade has been coilsidered as an engine of economic growth. Diversification of
resources slimulate a country for the foreign trade. Thc resources of the world may he
ulilised ei'ficiently through the foreign trade. The recent phenomenon of globalisation and
liberalisalioii also encourage the foreign trade, Ia this unit, you will Ieun the importance
ailcl wends of f m i g n trade. Conlposition and direction of foreign trade will be highlighted
will1 a view to draw an analytical picture of India's foreign trade. You wilI also b e
acquaiilled with the exporl promotional measures of the goverilnlent of India.

13.2 IMPORTANCE OF FOREIGN TRADE

Forcign Trade has heel1 proved beneficial for thc n~e~llber countries. Trade among countries
i~ccccleratcsthc ~[evelopnlenlillprocess of those countries. This is more true in the sense
"1
I.\IVVII.II SCC~~II. that the natural resources and the factors of production are not evenly distributed across
Reftrrn~s
;u~tlBcc~~\ort~ic
the world. As a result, some country may produce some of the products at cheaper cost
and attain specialisation in the production of that particular commodity. Let us say a
country finds specialisation in the production of steel. Another country may find it diffikult
to produce steel at that cheaper cost but it may produce other commodity, let us say
cement at cheaper cost. It becomes mutually advantageous for both countries to trade the
surplus stocks of steel and cement to each other. Thus, foreign trade helps in the effective
utilisation of world resources. The progress of a country depends to a large extent to their
ability to trade with the rest of the world. This ultimately leads to efficient einployment of
the productive forces of the world. It attracts foreign investment and new technology and
stimulates the don~esticfirm to become competitive and face the challenges of the world
economy. In specific terms, the importance of foreign trade has been outlined as below:
i) Greater availability of goods: Through foreign trade, it is possible for a country to
obtain those goods wh~chit cannot produce or cannot produce as cheaply as other
countries. Thus a country's well-being is determined by the extent to which it
participates in foreign trade. Consumers benefit from foreign trade as much as they
can purchase from the cheapest source. India depends upon foreign countries for a
substantial portlon of her supplies of petroleum products and capital goods, US
consunlers depend upon imports for the supply of coffee and sugar while the UK
consunlers ohtain the major portion of their foodstuffs and the entire supply of tea
from foreign countrim. Foreign trade can also help countries to overcome the adverse
effects of famines and crop failure.
ii) Better use of country's resources: Foreign trade helps in the utilisation of country's
resources in the best possible manner. In many cases, domestic industries depend
up011 i'oreign markets for the disposal of their production. For example, the jute i d
tca ~ndustriesof India ;re mainly dependel~tupon export markets. Japanese industry
depends upon exports for its prosperity. Though the US dependence on foreign trade i s
not so great, yet more than 25% of US produclion of a number of agricultural and
industrial production is exported. In many cases, the existence of an export market
enables the producers to increase their production and thus avail themselves of the
eco~~omies of large-scale production. Some domcstic industries dcpend upon foreign
countries for the supply of capital goods and equipment as also for their supply of raw
materials m d comnponents.
iii) Redrlction in costs of production: As capital goods and raw materials arc purchased
fro111 the cheapest sources, the overall cost of production goes down leading to lower
prices.
iv) Stability of prices: Whenever thc price o l some commoditx tends to increase in a
counLry, it can increase Lhe level of its imports of that comnlodity to check the rise in
prices. Simil;uly, whenever the price of a comn~odityfalls due to a glut in its supply,
the trend may he checked by exporting the same. This in turn leads to more or less
~uiiformprice throughout the world. Foreign trade could also he utilised to control the
.nefarious activities of mo~iopolists.
V) Greater employment opport~~nities: Foreign trade leads to an increase in doinestic
:~pricultur;rland industrial production which in turn generates more cn~ployrnentin the
c!~tlntrJ~.
vi) High rate of econornic development: Foreign trade leads lo' rapid economic
develoj~~uclltand higher rate of growlh in nalional iiiconle. In fact, lbreign t.rade was
co~lsidererlas an engine of growth. Many ctcvelnpetl countries likc the UKI the USA
and Japan owc heir prospc,rity to llieir cxports (:)I' ~nannfacturqlproducts. I11 recenl
YciNt;, many clcvelgping countries like Korea, Taiwan. Tlli~ili~l~d,
Singapore and
Hongkon~hasc he'nefi~cda lot hg active participation i n foreign.trde.
\.fir) Contl.ibotion to govel.nment revenues: Most po~~erllmcnls impose dutics on illll~orls
2nd somctinics ou exl~ortsloo, Tllesc dutics gcacratc s u h ~ ~ a ~ i rcvellucs
~iill [or UIC State
cxchcqucr. For cxamljlc, i n India. cusloms dut~cscontrihned 33.6 pcr cent or Lhc 10Ln1
thx rzvcniic ill 1996-07.
viil I-larn~oniousrelationship bet~veenvarious countries: Foreign trade is a m i o r i'orcc
l o 1iuki;iag various corn~lriesto eacl'l o(11er. I1 promotes harliloiliolls and cordial
 relationships between all of them. It can lead to world economio integration. This in
turn leads to political peace and greater cooperation among countries regarding socio-
cultural develogments. Growth of trade can lhus redme the likelihood of war.

13.3 TRENDS IN INDIA'S FOREIGN TRADE

Look at Table 13.1 for a clear understanding of India's Exports, Imports and Trade
Balance. The export has been gradually increasing but the iniport has increased at a faster
rate. As a result, the trade balance has been negative over the years. The table shows
that India's Trade Balance was Rs. -2 Crores during 1950-51 and it has gone up to
Rs. -20,102 crores during 1996-97. It is expected to touch -23,f344 croresSforthe year
1997-98. The trade deficit has been gradually increasing.

Table 13.1 : lkends in India's Foreign Wade

(Rs,in crores)

Exports (including 1111pori.s Trade Balance

Re-exports)

1997-98(P) 113018 136662 -23644

(April - Feb)
(P = Provisional)

SOII~CL!
: Economic Survey (1997-98), Ministry of Finance, Government of India

A reduction in trade deficit is possible either by a deduction in imports or by an increase

in exports. A reduction is not only necessary to curtail the trade deficit hut also because,
quite often, imported supplies are costlier than domestic supplies. Sonie of our iniports ,
consist of essential consumer goods which arc necessary to maintai~~ the donlestic price
stability. Any cut in these imports would adversely affect productioll leading to unutilised
capacities and a cut in exportable surpluses. Capital goods which have shown a significant
increase in the last few years now account for (22%) of the total imports of the year 1996-
97 hecause of the need for technology upgradation, Fuel accounts for (26%) of the total
imports for the year 1996-97. It may be.very difficult to c~utailthese imports because they
contribute to the economic development of the nation.
In the past, we depended on ioreign aid, largely consisting of loans, to finance our import
surplus, India's total debt was US $92.9 billion at the end of September 1997. The debt
service ratio was about 21.4% in the year 1996-97. Of late, India's external indebtedness
posilion has also iniproved in the global context. According to World Bank Global
Develol~nlentFinance 1998, India ranks eighth among developing countries i n terms Of
total indebtedness, India's external. debt is very high. Thus, there is no alternative but to
intensify export effort. The expansion in export sector will be able to generate the revenue
for meeting the import requirement.
Realisill& the importance of exports in the developmellt of the economy, Government of
India have been making continuous effort to promote exports. The Government took mil.ior
21
slyps i n July. 1991 hy introducing reforms in industrial, trade and fiscal policy, The trade
Ex*ernd Sector refonns aimed at creating environment to enable increase in exports at a rapid pace.
and Econo~nieRcfurnls
Country specific and conllllodity specific nleasures were taken to promote exports. The
Board of trade identified 34 extreme focus products aimed at achieving 30% annual growth
in exports. The Ministry of Commerce has undertaken in depth analysis for identifying
cou~ltriesand products for boosting exports. 15 products and 15 countries have been
identified cdveri~ig75% of India's foreign trade. The identified products include: gems and
jewellery, cotton yam, fabrics and made ups, man made yarn, marine products, transport
equipment, metal manufactures, machinery and instruments, leather, organic and inorganic
chemicals, dyes, iuternlediates, etc., plastic and linoleum products, agro-chemical and oil,
etc. The identified countries are US, Jppui, Gernlany, Belgium, UAE, Saudi Arabia, UK,
Singapore, Russia, Italy, Bangladesh, France, Netherlands, IJongkong and Thailand. In
order to boost exports, the country should make all out efforts to streamline the extcrnaI
sector .

Check Your Progress A

i) State the inlportance of foreign trade.

ii) Enumerate two methods of reducing trade deficit.

13.4 COMPOSITION OF FOREIGN TRADE

..
There h a k k e n 'substantial change in the composition of foreign trade over the years.
Several nbw?ms have been entered in the export basket. Let us discuss the skncture of
coiqrnodities in detail. Fltst we shall discuss the conlposition of exports followed by the
. cb&&&ition of imports.
A .

.-
13i4.1
I.?.
doriqosition of Exports
\

Gdia's export wis largely agro-based during 50's. Three principal traditional items- textiles,
'
jute manufactures and tea accounted for nearly 54% of the country's export. The
conttibution of all primary and traditional items was about 85% of the total export. During
this period, emphasis was given on the attainment of self sufficiency and there was
stringent restrictions on imports. ?he need of industrialisation was felt badly. Capital
.goods and technology were needed for the industrialisation. The country was not having
.modern
, .
technology, capital goods and raw materials for the fast developmental
requirements. Hence, it was further realised that only increased imports of technology,
machinery and essential raw materials could provide the foundations for the industrial base.
This would also generate export production for world markets, During 60's various
measures were adopted to give a fillip to India's foreign trade. Imports were made
relatively easier and the export promotion measures were adopted. As a rcsult, the share
of traditional items in the export basket started declining slowly. The share of iron and
steel, machinery, transport equipment, non-metallic mineral manufactures and chenlicals
started increasing.
Government of India gave a definite shape for the first time to the export policy during
70's. Exports were accorded the third place of importance next to the defence and food. As
a result, the major changes were witnessed in the composition of exports. The share of
traditional products went down further and non traditional items started increasing.
Engineering goods, lcathertand leather manufactures, readymade garments, gems and
jewellery, chemicals and marine products figured significantly. Thus, the exports of
manufactured commodity witnessed upward movement. The share of manufactured goods
in the total export went up from.45% in 1960-61 to 50% in 1970-71 to about 59% in
1980-81.
 The effort to enhance export further sustained during 80's. The share of manufach~red India's Foreign Trade
export to total exports increased significantly. The m?jor foreign exchange eariiers during
this period were gems and jewellery, readymade garments, engineering goods, leather
maiiufactures, marine products, chemicals, elc.

Table 13.2 : Composition of Exports

Agricultural and 284 487 2057 6317 9457 13021 , 13712 213.38 25040
Allied protlucts (44.2) (36.0)-. (30.7) (19.4) (17.6) (18.7) (16.6) (19.9) (21.0)
Ores and Minerals 52 164 414 1497 1814 2371 2538 3061 3185
(8.1) (12.1) (6.2) (4.6) (3.4) (3.4) (3.1) (2.9) (2.7)
Textile Fabrics an(\ 73 145 933 6832 12498 14863 19945 24149 27793
Manufactures (11.4) (10.7) (14.0) (21.O) (23.3) (21.3) (24.1) (22.7) (23.4)
Leather and Leather 28 80 390 2600 3700 4077 5057 5790 5609
Manufactures (4.4) (5.9) (5.8) (8.0) (6.9) (5.8) (41) (5.4) (4.7) .
I Gems and Jewellery 1 45 618 5247 8896 12533 14131 1'7644 16872

Chanicals &
allied 7
Products (1.1)
Machinery,
Transport 22
and Metal
Manufact- (3.4)
ures (including
, Ison
I & Steol)
Minexals, Fuels and 7
Lubricants (Including (1.1)
i Coal)
I Others 168
(26.1)
---".-
I Total 642 1355 6711 . ,32553 53688 69751 82674 106353 118817
?
.
..,
,
, .,b.

1 (Figures in ~ k n t h e s c sdenote percentag~).; .

s ~Finance, Government of India.
Source : Complied from Economic Surypy (1997-98), ~ i n i s t of
,,
90's witnessed a new era for the lndiks foreign trade. The forcign exchange reserves
dwindled to the lowest level in 1990-91, ' Realising the in~portanceof export in the
development of the e&onomy,the govehment of India introduced rcforms in industrial,
trade and fiscal policy in July 1991. In~portswere further liberalised and new export
promotional measures were. seriously adopted. The share of r n a ~ ~ l ~ c t l l goods
r e d lo the lolal
r ,exports went LIP from 59% during 1980-81 to about 73% in 19@-91. This share filrther
went up to 75% during the year 1996-97. 111e cornpositio~~ of eiQorts has also chai~ged
during 90's. Various new products have entered into the export-basket. Look at Table 13.2
which shows coinppsition of exports. Let us briefly aualyse thk.trends in major products
exported froin India.
Agricultural Products : The share of agricultural products was 44.2% in the year 1960-
61. The share of export was so high hecause of high concentration of export of primary
commodities. The share of export has come down to 36% in 1970-71 and 30.770 in 1980-
81. It has further come down to 19.4% in 1990-91. The thrust of export of manufactured
items and rilore value addition in the agricultural products led to the declined share of
agric~~llural
co~nrnoditiesto.;tl~etotal product.
The share of export of agricult~valand allied products has gone up from 19.4% in 1990-01
to 21.1% in 1996-97. New commodilies have been entered into the export basket of
agricullurd conmlodity. The ina+joragricultural export products are : lea, 'coffee, cereal,
unmanul'act~~ed tobacco, spices, cashewnuls, oil meals, fruits and vegetables, marine
Extemnl Sectur products and raw cotton. Marine products were the largest foreign earnings of the
and 'kononlic Reforms agricultural items followed by cereals and oil meals.
Rubher, rice, wheat, tobacco, soyameal, marine products, floriculture and processed food
are rated as the commodity of higher returns. Agricultural exports, which grew by 10.3%
in 1996-97, declined by 6.6% in April-January 1997-98. This decline was attribulable to
cereals and oil meal. The domestic demand for these two products increased sharply in
1996-97. Ceilings imposed on exports of wheat and rice and the European Union's ban on
marine imports also contributed to slower growth of agricultural exports. There is enough
scope to enhance the exports of agricultural commodities. In order to realise increased
foreign exchange earnings and achieve the targetted 20% growth, further value xddition is
needed in the agro-products.
Textiles fabrics and manufactures: ~extiles,fabrics aid manufactures account for 23.4%
of the total exports for the year 1996-97. The share of export of textiles fabrics and
manufactures was only (11.4%) in 1960-61 and 10.7% in 1970-71. The share of export
started gradually increasing during 80's and 90's. The scheme of export promotion of
capital helped in modernisation of textile sector. Favourable export environment and
government policy led to the surge in export during 90's.The export has been steadily
increasing since 1990-91. The export has increased by four times since 1990-91. Textiles is
the largest net foreign exchange earner because the import content in textiles is very low.
Being the labour intensive industry, India has competitive advantage in the manufacture of
textiles commodities. As a result of GATT and subsequently the implementation of the
market access provision, there is ample scope to increase the export of textiles commodity.
India would face stiff competition with the other South East Asian countries. Hence, it
requires immediate modernisation and upgradation of technology to capture the growing
world market of the textile conlinodities.
Leather and leather manufactures: It accounts for about 4.7% of the total exports for
the year 1996-97. The share of leather and leather manufactures was only (4.4%) of the
total export for the year 1960-61. It was gradually increasing and reached to 8% of the
total export for the year 1990-91,The share of leather and leather manufactures has come
down from 8% in 1990-91 to 4.7% in 1996-97. Tile exports have been adversely affected
due to objections by industrial countries against chemicals used in Indian tanneries. The
leather industry has been identified as one of the thrust areas and initiatives have been
taken to encourage value added exports of leather products.
' Gems and Jewellery: It accounts for 14.2% of 'the total export of the country for the
year 1996-97. The share of gems and jewellery was only 0.2% in the year 1960-61. It
started gradually increasing and reached to 9.2% in the year 1980-81. Favourable, export
environment and liberal iniport of inputs of jewellery led to the surge of export during
'90's. The share of gems and jewellery was 16.1% for the year 1990-91, it went up to
18% for the year 1993-94. Since then the share started declining and reached to 14.2% in
1996-97. Gems and Jewellery involves high content of import, There has been fluctuations
in the cost of raw materials in the international markets. The demand has also been
reduced considerably as a recession in the world market. India is having large number
of skilled personnel for the manufacture of jenls and jewellery. The industry requires
further modernisation to compete the growing world market.
Chemical and allied products: It accounts for 9.6% of the total exports for the year
1996-97. The export has beell steadily growing. The share of export was only 1.1% in
1960-61. It went up to 3.4% in 1980-81. It grew at a faster rate during 90's. The
liberalisation strategy facilitated the growth of export. The export has gone up from
6.5% in 1990-91 to 9.6% i11 1996-97. Stringent pollution control measures in the developed
world have facilitated the export of chemical products from the developing world. India
requqes to manuhcture chemical products of world standard to meet the demand of the
world trade:
Machinery transport and metal manufactures: It accounts for 14.7% of the total exports
for the year 1996-97. The share of export was only 3.4% in the year 1960-61. The
indurstrialisation policy favoured the growth of export Erom this industry. The share of
export went up to 14.6% in 1970-71. The share came down to 12,3% in 1980-81 and
11.9% in 1990-91. Slow industrial growth and recession were the major causes for
declining export, The export has beel slowly growing since 1990-91. There has been
I
collsiderable potential for the 'export of machinery goods and metal manufactu~es.The well India's Foreigh Trade
thought strategy is needed to exploit this opportunity. Tile quality needs to be improved to
match the international standards. The sector requires immediate automation, modernisatjon
and upgradation.
Minerals, fuel: and lubricants: It accounts for 1.5% of the total export for the year
,1996-97. The share Of export was 1.1% in the year 1960-61. The export has gone up to
2.9% in the year 1990-91. It has gradually gone dowil to 1.5% in the year 1996-97. There
is a stiff competition in the world market for the export of minerals, fuels and lubricants. It
requires further initiation and colnnlitment to increase the export of these commodities.
Besides these commodities, there is a large scope to enhance the export of tourism,
consultancy, handicraft items, etc, in the world market. This certainly requires proper
infrastructurd facilities to reap the benefits of exporl from these areas.

13.4.2 Composition of Imports

In order to attain self sufficiency, Government of.1ndia put slringent restrictions on imports
since beginning. The policy of import substitution was adopted to give boost to the
domestic industry. The second plan gave a new thrust to the process of planned
development with emphasis on capital intensive investment. The country was not in a
position to produce the required capital goods needed for the developmcntal purposes. The
need for import of capital goods was felt at this juncture. It was gradually realiscd that
increased import of technology, machinery and essential raw inaterials would be able to
enhance the industrialisation process of the country. Proper production facilities will
certainly provide room for the export business. Therefore, liberal import of capital goods,
technology and raw materials are required to boost thc export of llle country. You must
reinember here that import hill must he met by the cxporl proceeds. Hencc, the policy of
import management should be followed in such a nmnl~erthat export business gets a
boost.
During 60's India's imports comprised of capital goods (31.7%), iron and steel (11.0%),
peuoleunl, oil and lubricants (6.1%), ferrous metal (4.2%) and chemical elements and
compo~ulds(3.5%) and fertiliser and fertiliser inate (1.2%). lllcre has been a significant
shift in Lhe import composition. I11 the year 1996-97, the nla.jor import item was
petroleum, oil and lubricants (25.6%) followed by capilal goods (21.5%),pearls, precious
and semi-precious stones (7.5%), iron and steel (4.9%), ferrorus n~etal(2,8%), fertilisers
and Sertilised mate 2.3% and plastic materials (2.01%). Look at Table 13.3 which shows
the trends in India's inlporls. Let us now briefly learn the trend of India's major inlport
collimodilies.
Petroleum oil and lubricants : I1 accounts for 25.6% of the total iinports for the ycar
1996-97. The sharc in total inlport has increased Sour tinles fro111 6.1% in the year 1960-
61 to 25.6% in the year 1996-97. The irnl~orlhas been gradually rising since the increase
in prices of petroleum products in 1973. The fall in dornestic production of crude oil and
gulf cris~sfurthcr enhanced the'import bill of Lhe petroleu~nprod~~cts.Petroleum products
were considered as an important faclor for increase in import bill and widening trade
deficit during 80's. During the year 1980-81, the share of petrolcum products went up to
42% of the total import. The efforls were made to incrcase the production of petroleuin
oil in the domcstic market. The increased production arrested the increasing trend of the
petroleum imports. The share ol' import canle down to 25.0 in the year 1990-91.
The imporl went up marginally to 27% in 1992-93 and c a m down to 20.5% in 1995-96.
Thc inlport again went up to 25.6% in the year 1996-97. Petroleun~,being an exhaustive
nature, all-out efforts should be made to conserve it. Optinlun~ulilisation aiid proper
management are immecliatcly rcquircd. Optinlum utilisation and increase in doinestic
production lnav hr vcrv helnful in containing L11e mounting bill of petrolcum import.
 Table : 13.3 Composition of In~ports
(Rs. In crore)

Petroleurn oil
and lubricants 69 136 5264 10816 17142 10046 18613 25173 35629
(6.1) (8.3) (42.0) (25.0) (27.0) (13.7) (20.7) (20.5) (25.6)
Fertilisers and
feitiliser mate 13 86 818 1766 2832 2591 3304 5628 3235
(1.2) (5.3) (6.5) (4.1) (4.5) (3.5) (3.7) (4.6) (2.3)
Chemical elements
and compounds 39 68 358 2289 4134 4823 7344 9403 10832
(35) (4.2) (2.9) (5.3) (6.5) (6.6) (8.2) (7.7) (7.5)
Plastic materials 9 8 121 1095 1218 1363 1903 2687 2826
(0.8) (0.5) (1.0) (2.5) (1.9) (1.7) (2.1) (2.2) (2.0)
Pearls, precious and
semi-precious stones 1 25 417 3738 7072 8263 5116 7045 10384

Iron and steel 123 147 852 2113 2254 2494 3653 4838 6866

Non ferrous metals 47 119 477 1102 1144 1503 2954 3024 3925
(4.2) (7.3) (3.8) (2.6) (1.8) (2.1) (3.3) (2.5) (2.8)
Capital goods 356 404 1910 10466 10839 16663 19990 28289 29868
(31.7) (25.0) (15.2) (24.2) (17.1) (22.8) (22.1) (23.0) (21.5)

Total 1122 1634 12543 43198 63375 73101 89971 122678 138919

Sor~rce: Ecollomic Survey (1997-98), Ministry of Finance Government of India.

Capital goods : It accounts for 21.5% of the lotal import for the year 1996-97. As a
resull of implementation of the scheme of import substitution, the share of inlport of
capital goods came down from (31.7%) in the year 1960-61 Lo 25% in (1970-71). It further
came down to the level of 15.2% in 1980-81. During this period, the moderi~isationand
upgradation of technology were ericouraged. The share of import went up to 24.2% during
1990-91. As a result of the scarcity of foreign exchange and recession, the share of import
of capilal goods came down to 17.1% in the year 1992-93. The economic reforms
introduced the reduction of import duties and encouraged-the inlport of capital goods.
Capital goods got much importance after liberalisation. Again the share of capital goods
went up to the level of 23.0% in the year 1995-96. The share has marginally come down
in the ycar 1996-97 as a result of recession and slowing down of the investment.
Cllemical elements and compounds : It accounts for 7.5% of the total imports for the
year 1996-97. The share of chemical elements and compounds was ollly 3.5% in the year
1960-61. The share of inlport went up to 4.2% in 1970-71 and came down to 2.9% in
1980-81. During 90's the increased mauufact~uingacti,vities .in the pharmacel~ticalsector
and chelllical industries enhanced t l ~ edemand of chei~iicalingredients. The irnport
increased to 5.3% in1990-91. It further went up to 8.2% in the year 1994-95. It has
marginally collie down to 7.7% in 1995-96 and 7.5% in 1996-97.
Pearls, precious and semi-precious stones : It accounts for 7.5% of the total imports for
the year 1996-97. The share of iillport was only 0.08% in the year 1960-61. The share of
import has gradually illoved up to 1.5% in 1970-71 to 3.3% in 1980-81. There was a
surge in export in the gems and jewellcry sector during 90's. Pearls and precious stones
are impartant ingredient of gems and jewellerj. Hence the share of import went up to
8.7% in 1990-91. The upward movenlerit continued lill 1992-93 and the share of import
went up lo 11.3% iin the year 1993-94, The export of gems and jewellery suffered during
the period of 1994-96. As a result the share of illlport came down to 5.7% in the year
1994-95 and 1995-96, The illlporl went up to 7.5% i11 the y e u 1996-97.
Iron and steel : It accounts for 4.9% of the total import for the year 1996-97. The share India'lr Foreign Trade
of import of iron and steel was 11.0% in the year 1960-61. The share of iron and steel
has been gradually declining since 1960-61. During 90's the share of import was about
3.4% of the total import. The share of import has marginally moved up to 4.9% in the

Fertilisers and fertiliser mate : It accounts for 2.3% of the total import for the year
1996-97. The share of import was 1.2% in the year 1960-61. The use of fertilisers started
increasing after ne1.l agricultural technology was adopted during 70's. The share of import
went up to 5.3% in 1970-71. It further moved up to 6.5% in 1980-81. The domestic
pr~jd~lctionof fertiliser started increasing. The increased supply of fertiliser led to the
decreased import share to 4.1% in 1990-91. It further came down to 4.5% in 1992-93 and
3.5% in 1993-94. It went up to 4.6% in 1995-96 and came down to 2.3% in the year

13.5 DIRECTION OF FOREIGN TRADE

13.5.1 Direction of Exports

Look at Table 13.4 which shows India's export to major destinations. During the year
1960-61 India's major export partner was UK followed by USA, Japan, Russia, Germany
and France. They accounted for 57.4% of our total export. The share of individual
country to total India's export was - UK (26.9%), USA (16.0): Japan (5.5%), R ~ ~ s s i a
(4.5%), Germany (3.1%) and France (1.4%).
The trade agreements between India and East E~~ropean Countries on rupee payment started
bearing fruits during 70's. The policy of counter trade helped in rapid expansion of trade
between India and USSR. As a result, USSR became the leading market for India during
the year 1970-71. USSR remained the leading market for India's export during the 80's
followed by USA, Japan, UK and Germany. Germany became fourth largest export partner
of India during the year 1980-81. During the year 1990-91, Russia remained the major
export market followed by USA, Japan, Germany, UK, Belgium and France.
The significant change was witnessed in the direction of India's export after 90's as a
result of collapse of USSR. The share of export to'USSR wend down from 16.1% in the
year 1990-91 and subsequently changed trade policy also brought changes in the direction
of India's export. During the year 1996-97, India's major export market was USA
followed UK, Japan, Germany, Belgium, Netherlands and France. The significant growth
rate and unification in the form of European Economic community facilitated India's export
to Ellropean countries. Hence, the share of export increased in European nations. The
country wise share of export was - USA 19.8%, UK 6.1%: Japan 6.0, Germany 5.6%,
Belgium 3.3%, Netherlands 2.5% and France 2.2%. These 6 countries accounted for
45.5% of total India's export.
The above trend shows that India's export is highly concentrated in a few markets. It
requires to formulate a suitable strategy to diversify the export market,
Table 13. 4 : Direction of Exports
(Percentage share)

1960-61 1970-71 1980-81 1990-91 1992-93 1993-94 1994-95 1995-96 1996-97

26.9 11.1

1.4 ,1.2 2.3 '2.2

Netherlands 1.3 0.d 2.3
16.0 13.5 11.1 14.7 19.0 18.0 19.1 17.4 19.8
External Sector 5.5 13.3
and Economic Reforms
Saudi Arabia 0.5
Russia 4.5 13.7 18.3 16.1
Other Least
Developed
Countries 14.8 19.8 19.2 16.8 24.2 23.9
Others 25.2 23.2 21.7 19.2 24.4 23.3 24.4 23.5

100 100

Source: Economic Survey (1997-98). Ministry of Finance, Government of India.

13.5.2 Direction of Imports

Look at Table 13.5 Which shows India's imports from major destinations. During the year
1960-61 India's major importing partner was USA (29.2%) followed by UK (19.4%),
Germany (10.9%), Japan (5:4%), Iran (2.6%), France (1.9%,), Belgium and Russia (1.4%)
each and Saudi Arabia (1.3%). l%e scenario has changed over a period of 40 years. For
the year 1996-97 India's major importing partner was USA (8.8%) followed by Saudi
Arabia (7.3%), Germany .(7.2%), Belgium (6.3%), Kuwait (6.2%), Japan (5.7%), UK
(5.4%j; Iran (2.3%) and Russia (former USSR) 1.6%. The increasing quantity and amount
of import of petroleum products has made Saudi Arabia and Kuwait 2nd and 5th largest
import partners of India.

Table 13.5 : Direction of Imports

(Percentage share)

Country 1960-61 1970-71 1980-81 1990-91 1992-93 1994-95 1995-96 1996-97

29.2 27.7 12.9 12.1

Saudi Arabia

(former USSR)
Other Least
Developed
Countries 11.8 14.6 15.7 18.4 15.2' 20.2
Others 14.7 22.3 23.7 22.2 29.2 28.9 29.0 30.3

100 100 100 100 . 100 100

Source: Econoinic Survey (1997-98), Ministry of Finance, Government of India.

Check Your Progress B

1. Write the names of 5 major products exported from India.
................................................................................................................................................
................................................................................................................................................
2. Write the names of 3 rnqjor co~nmoditiesinlported to India. Indin's Foreign 'lhcke '

3. Fill in the blanks:

i) Textiles fabrics and manufactures account [or ....... of lolal India's export for Ihc
year 1996-97.
ii) Capital goods account for ....... of total India's import for the year 1996-97.
iii) The leading export partner of India is .........for the year 1996-97.
iv) The leading import partner of India is ....... for the year 1996-97,
V) Exports were accorded ........ placc of inlportance (luring 70's.

13.6 REGULATION OF'FOREIGN TRADE

The Objectives of India's trade policy have beell to promote exporls and restricl lhc
inlports to the level of foreign exchange available to lhe country. Goveroment
continuously nuke efforls to promote exports. These are certain iteins which are vital to
the economy. Hence, control is exercised over these items so that lhere should not be
scarcity of lhese ilenls in the country. For exaxalnple you must he awarc h a t the
government of India have recently bai~nedtlie export of onions as a result of onions
scarcity and rising prices in the domestic market. Therefore, exports should he proinoted
in such a manner that the country should not face the consequences of unrcgulaled exporls.
The country imports the colnmodities either to meet her domestic deinmd or to
manufacture lhe commodity for exporl market. 'I11e devcloping country in general and
India in particular face the problems of acute shortage of industrial raw materials, capital
goods and technology. The inlports of these conlmodities are essential for the
developiuental purpose but they cosl the scarce loreign exchange of Ihe country.
Therefore, the import regulalioil is required for proper inlporl manageinent. This means
that the iinport should definitely not adversely affect the doincslic market. It sl~ould
facilitate the trade and contribute to the healthy growth of the economy.
Foreign bade is regulated by the provisions or thc Import-cxport Policy 1997-2002 or any
olher law for the time being in force. The Foreign Trade (Development and Regulation)
Act, 1992 and rules and order issued theremder regulales India's foreign lradc. Forejgn
trade involves inflow and outflow of foreign exchange. Foreign Exchange Rcgulation Act
@ERA) 1973, now Lo be replaced by Foreign E x c h a i ~ gManagement
~ Act (FEMA)
regulates the transaclions involving foreign cxchange. Export and Import involve
movenlent of goods from one country to another country. Custoins Act, 1962 regulates
these movements. In order to enhance Lhe in~agcof India's products, manufaclure of high
quality products is required. Qualily Control and Inspectioll Act, 1963 ensures the quality
of products Lo be sold in the world market. Besides these Sour inzljor acts, there are a
nunlber of other rules, and regulations relilting Lo export and import of commodities, modes
of transportation, cargo insurance, excise clearance, international conventions, etc. These
regulatory framework required to be followed while operating in the foreign markel. Let
us briefly learn these major acts.
Foreign Trade (Development and Regulation) Act, 1992 : This acl provides for h e
developinent and regulation of foreign tradc by facilitating illlports into, and augmenling
exports from India, In brief, the act provides for Lhe following provisioils :
i) It illlows central government to inake order for the development and regulatioil
of foreign trade. The government may prohibil, reslrict or regulate the import
and export of goods.
ii) It allows central government Lo fornl~~late
and inlnounce the export and imnporl
policy.
iii) It provides detailed provision for ll~eallotnlenl and cancellalion of Imnporter-
E x l e r ~ ~Sector
d Exporter code llunlber and licenses.
:rntl Ecmlolnic Refo~.ins
iv) I1 provides powers for search, seizure penalty and confiscation ol gt)otls.
documents, etc.
V) The act provides provisiu~isfor appeal and revision of any ordcr ~lladeunclcr rhc
act.
Foreign Exchange hlanagement Act : As you kiiow that foragn excha~igeis i11 scarcc.
hence, it should be conserved by the country. For this purpose the dcaliligs of foreign
exchange wcre brought under Foreign Exchange Rcgulalion Act, I 973. The primary
obsectives of FERA were
i) to conserve the Soreign exchanpe
ii) to jltdiciously utilise the foreign exchange availal7le in the couiilry, and
iii) to prevent. the flighl of foreign exchange from the country.
Thc bill has been placed in the parliailleiit on 27th July, I998 lo replace FERA by Foreigil
Exchange Management Act. The main objectives of the bill ire to facilitate extcrnal ~rade
ilnd payments arid for promoting the orderly dcvelopi~lentaiid maintenance of foreign
exchaiige market in India. The focus has hecn given on saving of the foreign exchaligc
and ulilising it properly. The bill provides the provision for regulation and management of
foreign exchilllg~,dealiiigs of foreign exchange through authorised persons. the provisions
for coiluavcnlion and pe~iilllies,procedures tor adjudication illid appeal and power oC
directorate of enlorcement to rcgulate the foreign cxchange transactions.
Export Quality Control and Inspection Act, 1963 : The prim;lsy ohjeclive of this acl is
to slrengtheii the export tratlc through qttalily control and pre-shipment iinspection. The act
empowers the governmelit to notify coill~llodiliesSor compulsory quality control or
inspection. I1 also speciCies Lhe Lypes of quality control iieeded for thc comn~odities. It
prohibits the export a[ sub staiidxcl conimodities. The government of liidia has cstahUshcd
Exporl Inspection Couiicil uid Export Inspection Agencies for the purpose of elisuring the
quality of' lhe goods.
The Customs Act, 1962 : The goods and services should no1 move outside the country
without thc perlnission of the custoins ixuthorilies, The acl provides the legal framework,
guidelines and procedures related to the physical illovemeiit of the goods from oiic country
Lo another country. The hasic objectives oT this act are : i) to regulale Ihe exporl and
iinport trade transacliuus, ii) check sill~:ggling iii) impose custoin duty iv) collect
revenue, and v) gather trade stiltistics.

13.7 EXPORT PROMOTION MEASURES

Export pro~llotioilhas becoine iillporlant means or economic growth. Growing export
business helps in ean~ingscarcc l'oreigii exchange and stirnulaling the doillestic industry to
man~lfact~ut: the qualitative products Sor Ule world marltet. Moreover, with the illcreasing
hurden of debt servicing, exportihave eillerged as the only viable source of nleeting Ule
foreign exchange needs of the country. Hence, ail out cfforts should he made lo boos1
export. Efforts have heen milrle in the new policy to create export frieiidly cnviroiiinent to
promote export. Export Promo tioil has become the 111;l.jor lhrust area for Lhe government.
Let us briefly examine the major export promolioii ineasurcs initiated hy the government
of India. . %

13.7.1 Facilities for Creation of Production Base

In order to iilcfease the exports, slrong production hase nceds to be crealed. Proper
manufacturing facilitics lllily ensure lar&e cxporlable surpluses. It requires large invest~nent
and easy availahilily of iiipuls to the manufacl~~ring units. Lel us discuss nlajor facili ties
briefly.
Export Promotion Capital Goods (EPCG) Scheme : l'his scheme has been introduced
for liberal iinporl of capit~lgoods. Under this scheme, capital goods for t l ~ cillanufact~~re
of goods and for providing services, call he imporlcd at zero duty or 10% (duty ilpainst au
obligatio~ity exporl four ilenls ol' CIF value over 5 years and six times of CIF value over
 8 years respectively. Computer systems can also be imported under this scheme. Import of
capital goods for f m l sector may also be allowed.
Export Processing zones (EPZs) : 100 % Export Oriented Units - The Export
Processing Zones have been set up to provide an internalionally co~npetitiveduly lice
environnlent for export production. Various facilities have been provided to the units
established in the zones so that they could produce tlle quillikti~eproducts at reasonable
costs for [he world market. There are seven EPZs in the country. They $re Kandla
(Gujarat) Santacruz (Bombay) Falta (Wesl Beugal), Noida (UP) Cochin (Kerala), Chauiai
(Tamil Nadu) and Visakhapatnarn (Andhra Pradesh). The Santacruz Electronics Export
Processillg Zone is meant exclusively for export of electroilic goods and gems and
jewellery goods. The other zones are producing all types of products. Under the schen~e
of 100% EOU, the manufacturing units may be set up in any part of the country provided
they are meant for exports. EIectroilic Hardware Technology Parks (EHTP) and Software
'
Technology Park Units (STP) have also been established to encourage hardwwe and
software exports.
These wits are permitted to sell 25% of the production in value terms to Lhe Donlestic
Tariff Area (DTA) subject to payment of applicable duties. Rejects upto 5 % of' the value
of production may also be sold in the donleslic marlcet. Supplies from DTA LO there units
are treated as deemed exports. Foreign equity upEo 100f% is pernlilted to these units.
There units are exenlpted from payment of corporate incolne tax tor a block of 5 in
the first eight years of their operation.
Duty Free Licenses : I11 order to facilitate the supplies of inlported raw materials to thc
export sector, the duty free licences have been provided. Imporl of raw matcrials,
intermediates, conlponents, consumables, parts, accessories, mandatory spares and packing
nlaterials may b e pernlitted against a duty free licence. Duty free Iicences include
Advance Licence, Advance Intermediate Licelice and Special Tmprest Licence.
Advance licence is granted to a merchant exportcr or manul'acturer exporter for the iinport
of inputs required for the manufidcture of goods without paynlcnt of basic custo~llsduly.
Advancc Internlediate licence is granted to a ma~lufilcturerexportcr for the illlport o I' iilpu ts
required in the manufacture of goods to be supplied to the ultimale exporter. Special
Imprest licence is granted to a manufacturer exporlcr for the ililport 01' inputs rcquircd in
lhe manufacture of goods to be s~~ppliecl to the categories menlioned in the policy. Duty
Exemption Pass Book Schane has been also provided to exporters. You will learn illore
about it in Unil 14.

1 13.7.2 Facilities by Creating Special Status 1

Export Houses, Trading EIonses, Star Trading I-fouses and Super Star Trading Houses:
Tlle registered exporters having a record of exporl performance are granted special slalus
in thc forin of Export Houses1 Trading HouscsfStar Trading HouseslSuper Star Trading
Houses. The slatus inay bc granted subject to the f~llllfillmcnloC minimum annuaI average
cxport perfor~uance. The export performance criteria nlay he based o n cilhcr Frce on
Board (FOB) value of' exports or Net F o r e i p ~Exchilnge
~ (NFE) made during Ll~cpreceding
years. The objective of this schenle is Lo provide special stalus Lo the exporlcrs and
motivate t h a n to further contribute in tile cxtcrnal scclor o f the economy. Various
facilities have been provided to tbein so that they are cncouragcd to ~llalcegreater el'iilrts to
boost exports.

13.7.3 Fiscal Incentives

F~scal111centiveshave heen provided to exporlcrs with a view to motivate thenl to i~~crcasc
the exporl from the comllry, The nlajor fiscal iuce~llivesilre duty draw back scheme,
ceiltral excise rebate and inconle tax exolnplioll 011 cxport profits. Let us learn then1

I briefly. t
t
1
1
I
i) Duty Drawback : This schel~leprovides for rcrilu~dof import duty on raw
materials, conlponeuts, and packing rnatcrials used in export producl. This i
results in s~lbstantialreductioil in thc cost of inputs used i11 export production. '9
II
I The scheme is being govancd by tl-le drawback mles notified hy t l ~ edrawback 1:
I' director, Ministry of Finance, The drawhack rates we of Lwo types: (i) all
"i
I
1

ii
j
'I j
External Sector industry rates and ii) brand rates separately fixed for individual manufacturer of
.and Econonlic Refornls the export products. The drawbacks have been significa~itlyrevised and
improved. The government 01India have also provided duty drawback credit
scheme. Under this scheme specified commercial banks may grant credits based
on the duty drawback elilitlelnents of the exporlers. Duly drawback scheme helps
Lhe exporters lo bring down the cost of inputs required for the export purposes.
ii) Central Excise Rebate : The cenkal excise duty on tl~einputs and final
products me refunded to the exporlers wider this scheme. The scheme also
provides for a bolid system under which outright exeunption fro111 central excise
duty can hc claimed by the exp0rte.r. It helps in the reduction 01total cost of
production of the exports.
iii) Income Tax Exemption : Export profits are totally exeinpted from income tax,
This benefit has also been extended to manufacturers, exporting through Export /
TradingISLar Houses. A five year tax holiday has been granted to the units in
EPZIEOU. Export sales iue also exelnp ted from sdes tax.
Besides these fiscal incentives varlous financial incentives have also been provided to [he
export sector. For extvllple availability of working capital at concessional rates to the
exporters.

13.7.4 Market Development Assistance

This assistance is provided for overall developn~cntof overseas market. It is provided for
sponsoring, invit.ing trade delegations within and outside the country, markct studies,
publicity, setting up of tvareliouses/showroon~s,research and development, q~rdlitycontrol,
etc. The assistance is disbursed by Federation of Indian Export Organisation (FIEO) and
MinistTy of Commerce.

Check Your Progress C

1. What is Advance Licence ?

...............................................................................................................................................
2. What do you mean by Duly drawback ?

..............
..............................................q...a.............................................................
I................

3. What is Special Inlprest Licence ?

4. State whether the rollowing statenleiits are True or Fdse.

i) USA is the largest trading partner of India.
ii) Trade deficit may be reduced by an increase in imports
iii) Textiles fabrics and Manufactnres have become the leading export i t e n of the
country for the year 1996-97.
iv) Petroleum oil aud lubricant and capital goods together account for 47.1'10 of the
total India's imporls for the year 1996-977
\r) Inlport has bee11 further restricted in the new Export- Inlport Policy
1997-2002.
 13.8 LET US SUM UP
Foreign trade helps in efficient utilisation of world resources. It is considered as an e~lgine
of eco~lonlicgrowth. The ilnportance of foreign trade lies in greater availability of goods,
better use of country's resources, reduction in costs of production, stability in prices,
grealer enlployiilent opportunities, high rate of ecolionlic development, contribution lo
goveriinlent revenues and fostering har~noniousrelationship between various countries.
India is having large trade deficit which may he bridged by increase in exports.
The pattern of India's foreign tradc has substa~itiallychanged over the years. During 50's
aiid 60's illajority of export items were primary coillmodities like cotton, jute aiid tea.
They accounted for 54% of the countryis exporl, For the year 1996-97, the inajor exporl
iteins were textiles fabrics and mimufactures, agricultural and allied products, gems and
jewellery , machinery, transport and nlelal manufactures, chenlical and allied prod~~cts,
leather and lealher manufactures, etc. The nlajor i~llportsfor the year 1996-97 colisists or
pctrole~unoil and lubricants, capital goods, pearls and precious stones, cheillical producls,
iro~iand sleel, f'ertilisers, etc. The substantial change has also heen witnessed in the
major markets for India's foreign trade. The major export partners are USA, UK,
Ger~l~any, Bclgium, Nelherlands, and France for the year 1996-07. The iilajor import
pulners are USA, Saudi Arabia, Gerlliany, Belgium, Kuwait aiid Japan for the year 1996-
97.
The priinary objectives of India's foreign trade have been to promote exports and restrict
the import to the level of foreign exchange available to the country. Coiitrol is also
exercised for certain items which are vital to the economy. Hence, regulation of foreign
trade is required lor efficient operation of foreign trade. Foreig~ltrade is regulated by Lhe
provisio~lsof the Export - Import Policy 1997-2002. The major foreign trade governing
acls arc Foreig~iTrade (Development and Regulation) Act, 1992. Foreign Exchange
Ma~iage~uent Act, C~isto~lls Act, 1962 and Qualiry Co~~lrol and Iiispectio~iAct, 1963.
Export promotion has become the ~naiorthrust area [or the government. The niajor export'
promotion llleasures are Export Promotio~lCapilal Goods Schane. Export Processing
Zones and 100% Export Orie~ltedUnils, Duty Free Licences, Export HousesKrading
HouseslStu Tradi~igHouses and Super Star Trading Houses, Duty Drawback Scheme,
Ce~itralExcise Rebate, Income Tax Exemption and Market Development Assistance.

13.9 KEY WORDS

Capital Gootls : PlanL, machinery, equipment or acccssorics required for protluctioli
L
process.
Duty Drawback : Schenle of r e f ~ ~ nofd import duty 011 raw materials, conlponents and
packing nlaterials used in export producl.
Mannhctnrer Exporter : A person who exports goods maiiul'acl~~red
by him.
Merchant Exporter : A person engaged in trading act~vilyand exporting.
i
Trade Deficit : Excess of i~llporlsover exports.
I

13.10 ANSWERS TO CHECK YOUR PROGRESS

B 3 i) 23.4% ii) 21.5% iii) USA iv) USA v) third i
C 4 i) True ii) False iii) Tnlc iv) Truc v) False

13.11 TERMINAL QUESTIONS

1. Outline thc trcnds in I~idiil'sroreign trade. Do you Lliink that India's wade delicit is
alnrnling ? Discuss the nleasures for reducing lradc dcl'icil.
2. Discuss the changes witnessed in the composition 01' India's export. Analyse the shiwe
ol' increasing exports of the new commodilics.
External Sector 3. Describe the directional pattern of India's foreign trade.
and Economic Refonns
or India.
4. , Describe the recent export promotion measures of the gover~~nlei~t
5. Write notes on :
i) Duty drawback schenle
ii) ,Duty free licence
iii) Direction of import
iv) Foreign Trade (Development and Regulalion) Act.

Note: These questions will help you to understand the Unit better. Try to write
answers for them, but do not send your answers to the University. These are
for your practice only.