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Figure 2.3: Volume of Exports of Developed, Developing and Transition Economies: 1990-2009
(Index, 2000=100) http://www.wto.org/images/img_mdg/fig1_e.gif

Source: WTO Secretariat estimates.

However, it is worth noticing that all the developing countries are not equally open to international trade. The Figure 2.4 given below represents, Asia tops with a 10 per cent share of world exports in 1990 (US$ 335 million) which increased to 21 per cent (US$ 2,603 million) in 2009 and Africa had the smallest share in world exports, at 3 per cent, both in 1990 and 2009. The share of Latin America and the Middle East in world exports too remained almost constant without any remarkable increase from 1990 to 2009. The share of others constantly fluctuated between 1 to 2.8 per cent from 1990-2009. This shows that there is need for adopting more outward oriented trade strategy for those countries which are more conservative towards international trade. 

Figure 2.4: Share of Developing Economies in the Value of World Exports, by Region: 1990 to 2009 (in percent) http://www.wto.org/images/img_mdg/fig3_e.gif

Source: WTO Secretariat estimates

The various international institutions like World Bank, IMF, and WTO too emphasised the need for developing countries to follow trade liberalisation and open their external sector. The emergence of WTO trading system has brought about substantial decline in trade barriers among countries over past few decades. The various trade negotiations and agreement under WTO has favoured developing countries. The Fourth WTO ministerial meeting in Doha in November 2001 had the objective to achieve the development dimension of trade mainly for developing countries. This was part of larger agenda set by the UN Conference on the Least Developed Countries held in May 2001 in Brussels where it was decided to “lower trade barriers to LDC exports, reduce the debt burden through quick and effective implementation of the enhanced ‘Heavily Indebted Poor Countries Initiative; cancel outstanding official bilateral debt”12. The WTO trading system followed policy of liberalisation which calls for greater market orientation through removal and reduction of all tariff and non-tariff barriers. The phasing of Multi-fibre trade arrangement in textile by 2005, MFN clause and transparency in trade rules is some of the best step under WTO negotiations towards trade liberalisation which has to be followed by all the member countries.

However in spite of all these efforts there are still many developed and developing countries that follows traditional and new measures of protection like tariffs and non-tariff barriers. In the table 2.7 given below for year 2006 we can see that tariffs of developed countries have been falling steadily over the last two decades. The simple effectively applied tariff average is as low as 3.91 per cent. The trade-weighted effectively applied tariff is as low as 2.1 per cent. However, tariffs effectively applied on agricultural products remain significantly higher than those effectively applied on non-agricultural products. The former (trade weighted) are on average as high as 12.6 per cent, while the latter remaining on average below 1.5 per cent. Not only this, developed country impose higher effectively applied tariffs (trade weighted) on developing countries than on other developed countries, while the reverse is true for simple tariffs averages. However, the rate of protection effectively applied on agricultural goods is on average is higher for developed trade partners than for developing trade partners. The tariff applied by developing countries are high in contrast with the developed countries which is however viable because of their weak economic structure. Besides the tariff, Non-tariff barriers (NTBs) are becoming more popular in recent years and are of concern to developing countries, it includes technical measures – including technical regulations, standards and sanitary/phytosanitary regulations, and price control measures such as anti-dumping actions, customs and administrative entry procedures, para-tariff measures (e.g. import surcharges and additional charges), and other regulatory measures. Out of above, technical measures are more common in recent years (fig 2.5).



Table 2.7: Trade Weighted Applied Tariff Average, in year 2006 – In %




ALL PRODUCTS

NON-AGRICULTURAL

AGRICULTURAL




Effectively

applied tariff



Most-

Favoured-

Nation tariff


Effectively

applied tariff



Most-

Favoured-

Nation tariff


Effectively

applied tariff



Most-

Favoured-

Nation tariff


Applied by developed countries on imports from:

DEVELOPING ECONOMIES

2.3

3.3

1.8

3.1

10.3

13.8

ECONOMIES IN TRANSITION

0.9

2.3

0.6

1.9

13.4

19.4

DEVELOPED ECONOMIES

2.0

3.0

1.2

2.2

14.8

16.2

Applied by developing countries on imports from:

DEVELOPING ECONOMIES

4.3

5.2

3.8

4.5

14.7

17.4

ECONOMIES IN TRANSITION

4.8

5.2

4.3

4.7

14.0

14.1

DEVELOPED ECONOMIES

5.7

7.3

5.0

6.5

16.2

19.4

Note: Developing countries excludes China

Sources: UNCTAD, TRAINS/WITS



Figure 2.5: Evolution of Non-Tariff Barriers use by Broad Category - In %

Sources: UNCTAD, TRAINS/WITS

There is a need to realise by all the countries whether developed or developing the growing significance of international trade in countries growth and development and should adopt their individual trade policies accordingly to promote trade. The Developed countries should provide special treatment to exports from the developing countries and should provide greater freedom in access of their market by them. On contrary developing countries should embrace that trade liberalisation policy which is conducive to their own economy and do not adversely effects its own domestic industries, employment, income and growth. As Rodrick argued in his paper ‘Trade Policy Reform as Institutional Reform’, that “no country has developed successfully by turning its back on international trade” and no country has developed by simply liberalizing its trade. He used data from the last 50 years to prove that there is no evidence that trade protection has a systematic correlation with growth. In the same time, Rodrik suggests that the tendency to overestimate trade openness has no strong empirical evidence. He brings the example of East Asia, China and India in the early 1980s to show that a partial and gradual institution building in combination with a partial and gradual opening up to imports and foreign investment could also provide a significant source for growth. He suggests that countries that are in early stages of reform might follow similar paths. Rodrik does not refute the concept that liberalization of trade does go hand-on-hand with development, but he believes that each country has to adopt its own trade policy and investment strategy: a mixture of “orthodoxy [enlightened standard view] with unconventional domestic innovations”13.

Thus it could be seen that the fruits of liberalization has been enjoyed by all the economies. Yet, in any economy, liberalization has costs and benefits that must be weighed carefully. It is thus important to design liberalization policies – of goods and services - in a way that costs are absorbed without significant social stress and that additional measures are taken to ensure that the expected benefits will be actually forthcoming. A crucial factor to consider is the adequate liberalization pace and sequence, in particular, the time needed for the development of long-term comparative advantage in some economic activities. Thus, the process should proceed by stages, synchronizing liberalization with the country’s economic conditions14.



5. INTERNATIONAL TRADE AND INDIA

India being a developing country is set on a path of development. Its economy too has experienced many favourable effects of international trade. International trade has always been at a core of our country. Whether to talk about present or ancient India, Indian products have always capture an important place in international market. Economic history of country reminds us of the heritage of the country’s richness. Ancient India was powerful and prosperous and the products of Indian industry enjoyed a worldwide reputation. India excelled in cotton fabrics, woollen cloth, and silk of all kinds and also in varieties of artistic goods like enamelled jewellery. Besides, above goods, its export also consisted of handicraft goods, brass, textile goods, copper, pots, spices etc. and imports consisted of brass, tin, wine etc.

In early days, the foreign trade of India was in advanced stage. Indian goods were sent to European market in large quantities. Later on the East Indian Company founded in the country, which secured complete monopoly over trade, and the British rule established in India. Indian products like indigo, cotton, silk, wool, pepper etc. were supplied in huge quantity to England. In the second half of 19th century, our country became major supplier of foodstuff and raw material to industrialised countries and an importer of manufactured goods. The production of finished product was discouraged at home this led to decline in industrialisation at home, and a result of competition from British manufactures, the indigenous handicrafts suffered a severe blow. Finally, India got independence on 15th August 1947 and since then India’s foreign trade has undergone significant transformation.

At the time of independence, Indian economy was stagnant as it was ruined by British rule so need arise to adopt massive development programme. A big task of transition of economy from stagnant to dynamic was ahead India. The strategic objective of Indian policy makers at the outset of independence was the creation of a self-reliant economy and the reduction of the high levels of poverty that existed (Kelkar, 2001)15. History has revealed that the country with rapid industrialisation has grown at much faster pace so India too adopted the objective of industrialisation in the second five-year plan. The role of foreign trade is inevitable in countries, which set up in motion the process of industrialisation. An import of capital goods and technical knowhow, which cannot be produced at home in the initial stages of country’s development, becomes essential. These imports are very important for utilising the productive capacity of the country and starting up various projects. Thus, India, in the process of development rested upon advanced countries for supply of essential commodities. However, its export constituted of primary products.

At early stage of development imports tends to be more this formed Balance of payment problem, this necessitates the exports to play major role. Exports enable a country to earn foreign exchange that is used to finance imports. It constitutes the key factor in deciding sustained rate of economic growth. At initial stage of development countries like India exports traditional items like raw material and foodstuff but with economic development non-traditional items like manufactured goods takes major share in India’s exports.

The role of international trade in India economy is significant in different sphere. Where the importance of the export sector to the development process has long been recognized by many economists. Exports, by fostering specialization helps to benefit from comparative advantage; utilizing the full capacity of plant size where domestic demand is less than full capacity production; getting benefit of greater economies of scale due to large market; expanding aggregate demand; increasing the rate of investment and technological changes; enabling import of essential raw materials and capital goods, result industrialization and thus rapid economic growth in developing economies (Chennery, 1979; Kavoussi, 1984; Ram, 1987; and Moon, 1998). Export had significantly contributed in countries national income and output. The contribution of country’s exports in its GDP at market prices has continuously increased since economic reforms from 6.7 per cent in 1991-92 to 16.5 per cent in 2011-12, as represented by the data on value of exports as a percentage of GDP at market price in the table 2.8 given below.


Table 2.8: Exports as Percentage of GDP at Market Price

Year

Exports as Percentage of GDP

1950-51

6.0

1956-57

4.6

1960-61

3.7

1966-67

3.6

1970-71

3.3

1976-77

5.66

1980-81

4.6

1986-87

3.95

1990-91

5.7

1991-92

6.7

1992-93

7.1

1993-94

8.0

1994-95

8.1

1995-96

8.9

1996-97

8.6

1997-98

8.5

1998-99

8.0

1999-00

8.1

2000-01

9.7

2001-02

9.2

2002-03

10.4

2003-04

0.8

2004-05

11.6

2005-06

12.4

2006-07

13.3

2007-08

13.1

2008-09

15.1

2009-10

12.9

2010-11

14.2

2011-12

16.5

Source: Calculation is based on data taken from RBI bulletin

Exports not only contribute in countries GDP but also provide employment to large number of domestic resources. In India there are many export industries which absorbs huge labour force of country and had created around 14 million jobs directly or indirectly from 2004 to 2009.



Exports has enabled India to earn foreign exchange which is imperative to finance growing imports of the country and since independence India has earned huge amount of revenue through international trade as given below in the figure 2.6. The figure is drawn on the basis of receipt through export of goods and services extracted from the record of country’s balance of payment.

Figure 2.6
Source: Figure is computed on the basis of data from RBI, Handbook of Statistics on Indian Economy and Economic Survey (various issues).
Like exports India’s imports too is important as it meets the countries growth requirement and changing demand pattern of people. Since independence India’s has imported bulk of consumer goods which meets countries food requirement and provides consumer with variety of products of foreign country, import of capital goods facilitates domestic industrialisation and provides tool for infrastructure development within the country, likewise import of export related items helps in smooth growth of export production and petroleum and other products meets fuel and other requirements of the country. The table 2.9 given below shows the pattern of countries imports as per the significance.

Table 2.9: Composition of India’s Imports

(In Million Dollars)

Year

Petroleum, Crude and Products

Consumption Goods

Capital Goods

Export Related Items

Total Imports

1990-91

6028.1

556.5

5835.6

3680

24072.5

1995-96

7525.8

969.7

10330.2

5257.5

36675.3

2000-01

15650.1

1443.2

8941.1

8058.6

50536.5

2001-02

14000.3

2043.2

9882.2

8260.0

51413.4

2002-03

17639.5

2411.0

13498.2

10313.7

61412.1

2003-04

20569.5

3072.8

18278.2

12716.8

78149.1

2004-05

29844.1

3013.5

25135.0

16649.1

107166.1

2005-06

43963.1

2766.6

37666.2

18641

149166

2006-07

56945.3

4294.1

47069.1

17871.7

185735.2

2007-08

79644.5

4600.3

70110.5

20768.3

251439.2

2008-09

93671.7

4975.3

71833.1

31930.8

298833.9

2009-10

87135.9

9012.7

65865

31270

288372.9

2010-11

106068.2

8720.3

71627.2

49639.4

352575.0

Source: RBI, Handbook of Statistics on the Indian Economy.

The international trade and FDI are inter-linked and growing trade had facilitated the flow of FDI within the country, which is important for growth of export sector and also the domestic industry and infrastructure. In some years, annual growth rate in FDI has registered negative growth rate due to depressed world economy.



Table 2.10: In Flow of FDI in India

Year

FDI( In US$ million)

Annual Growth Rate

1992-93

315

144.2

1993-94

586

86.0

1994-95

1314

124.2

1995-96

2144

63.2

1996-97

2821

31.6

1997-98

3557

26.1

1998-99

2462

-30.8

1999-00

2155

-12.5

2000-01

4029

87.0

2001-02

6130

52.1

2002-03

5035

-17.9

2003-04

4322

-14.2

2004-05

6051

40.0

2005-06

8961

48.1

2006-07

22826

154.7

2007-08

34835

52.6

2008-09

37838

8.6

2009-10

37763

-0.19

2010-11

30380

-19.5

Source: RBI, Handbook of Statistics on the Indian Economy.

Data for 2009-10 and 2010-11 are provisional

Data on FDI have been revised since 2000-01 with expanded coverage to approach international best practice. Data from 2000-01 onwards are not comparable with FDI data for earlier years

Initially during early years of independence, India had it major trade with Britain and other commonwealth countries. Since there was dearth of industrialization, it principally exported raw materials and agricultural products and imported light consumer goods and other manufactures. However, in the past 65 years there has been a substantial change in countries economic and organisational structure, which has resulted into considerable change in India’s foreign trade in terms of composition and direction.

Prior to economic reforms of 1991, the external sector of the country was strictly regulated by the government through various kinds of rules, policies, restrictions and licence. In the latter half of eighties, Indian economy started opening up and in 1991, Government of India introduced several reforms to do away with regulations and control on major sectors of the economy like; trade, industry, agriculture, foreign trade and investment, financial sector and so on. As analysed by Arvind Virmani, there has been two phases in India’s development history since independence. These phases were characterized by two different policy regimes. The period of 30 years from 1950-51 to 1979-80 was the phase of socialist experimentation, in which the ‘Indian version of socialism’ was developed and instituted. The second phase of economic development started at the beginning of the eighties (1980-81) and continues till today. This was the phase of ‘Market Experimentation’, in which the oppressive control regime set up during the first phase was modified and physical controls gradually removed. This first step towards the liberalization and globalisation of Indian economy has benefitted the country, as Dr. C Rangarajan said in his address on current economic trends that the decade of the 90s has seen India rapidly transforming into high growth economy. There has been an enormous change in the economic environment since 1991, with the introduction of reforms as part of a comprehensive stabilization and structural adjustment16. With the opening of the economy along with other structural transitions within the country, both exports and imports of the country have undergone significant change in terms of value, volume, composition and direction.

The share of India in world merchandise exports was 2.1 per cent in 1950-51, 0.6 per cent in 1970-71 and 0.5 per cent in 1990-91. This declining trend was basically the result of adoption of inward oriented development strategy which made India insulated from world trading system. But however after the opening up of economy since 1991, the share in world merchandise exports has improved and it was recorded 0.6 per cent in 1995-96 which rose to 1.0 per cent in 2005-06 and 1.67 per cent in 2011-12. The share of India in world services exports is better than that merchandise exports and has risen to 3.3 in 2011-12 from 2.2 in 2003 and 0.59 per cent in 1990-91. The total value of merchandise trade has gone up from US$ 2542 million in 1950-51 to US$ 794040 million in 2011-12 (see table 2.11). However India, with some exceptions, always faced deficit in its balance of trade i.e. imports always exceeded exports. This was because as India being a developing country constantly struggled for rebuilding and modernization of its economy and hence imports increased because of increasing requirements of capital goods, defence equipment, petroleum products, and raw materials whereas the exports remained relatively sluggish owing to lack of exportable surplus, competition in the international market, inflation at home, and increasing protectionist policies of the developed countries. But however India’s service trade have shown a remarkable performance since independence and export of services remained more than import of services.


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