Foreign Trade of India Notes | Indias Foreign Trade Notes PDF 2023

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Foreign Trade

Before independence, the foreign trade of India was being operated on the principles of colonialism. But after independence, there have been huge changes in its state and direction. After independence, inward-looking foreign trade policies were accepted and the policy of import replacement was its base. Efforts were made for trade liberlisation during the decade of 1980 and the comprehensive policy of liberalisation and globalisation was made in the decade of 1990s (after the year 1991).

Volume of India’s Foreign Trade

After independence, Indian foreign trade has made cumulative progress both qualitatively and quantitatively. Though the size of foreign trade and its value both have increased during the post-independence era, this increase in foreign trade cannot be said satisfactory because the Indian share in total foreign trade of the world has remained remarkable low.

Composition of India’s Foreign Trade

Imports have been classified into Bulk imports and Non-bulk imports. Bulk imports are further sub-divided into Petroleum, oil and lubricants (POL) and non-POL items such as consumption goods, fertilizers and iron and steel. Non-bulk items comprise of capital goods (which include electrical and non-electrical machinery), pearls, precious and semiprecious stones and other items.

The structural changes in imports since 1951 show: (a) rapid growth of industrialisation necessitating increasing imports of capital goods and raw materials; (b) growing imports of raw materials on the basis of liberalisation of imports for export promotion; and (c) declining imports of food grains and consumer goods due to the country becoming self-sufficient in food grains and other consumer goods through agricultural and industrial growth.

Exports of India are broadly classified into four categories: (i) Agriculture and allied products which include coffee, tea, oil cakes, tobacco, cashew kernels, spices, sugar, raw cotton, rice, fish and fish preparations, meat and meat preparations, vegetable oils, fruits, vegetables and pulses; (ii) Ores and minerals which include manganese ore, mica and iron ore; (iii) Manufactured goods which include textiles and ready-made garments, jute manufactures, leather and footwear handicrafts including pearls and precious stones, chemicals, engineering goods and iron steel; and (iv) Mineral fuels and lubricants.

Direction of Foreign Trade

India is having maximum trade with OECD countries (mainly the USA, EU and Japan).

The direction of Indian trade registered a change during recent past years. Indian trade has been partially shifted from West-Europe to East Asia and OECD countries.

The high growth rate in Japan and ASEAN countries gave a high demand and favourable market to Indian exports. This has been one of the major reasons responsible for increasing Indian exports to the East-Asian region of the world.
USA is the India’s largest trading partner accounting for nearly 18% of our exports and 6.44% of the imports. The share of non-traditional items and value added products have been increasing in our exports to USA while imports comprised mostly engineering and chemical products. India accounts for only about 1.06% of USA’s total exports and imports. American trade laws like Super-301 and Special-301 are not conducive for Indo-American trade.

Balance of Payment — A statement of all transactions of a country with the rest of the world during a given period. Transactions may be related to trade, such as imports and exports of goods and services; movement of short-term and long-term investments; gifts, currency and gold. The balance of payments may be classified into current account, capital account, unilateral transfer account and gold account.

Balance of Trade — Part of the nation’s balance of payments concerning imports and exports. A favourable balance of trade means that exports exceed imports in value.

Invisibles — A term used to describe those items, such as financial series, included in the current Balance of Payments accounts, as distinct from physically visible Imports and Exports of goods. Invisibles include government grants to overseas countries and subscriptions to international organizations, net payment for shipping services, travel, royalties, commissions for banking and other services, transfers to or from overseas residents, Interest, Profits and Dividends received by or from overseas residents.

Foreign Exchange Reserves in India

  • The foreign exchange reserves of the country include three important components : (i) Foreign Exchange Assets of RBI. (ii) Gold Stock of RBI (iii) SDR holdings of the Government.
  • After 1991, Indian foreign exchange reserves have rapidly increased due to various reasons which are as follows: (i) Devaluation of Rupee. (ii) Availability of loans from international institutions. (iii) Availability of foreign exchange from NRIs under various schemes. (iv) Increased foreign investment (both direct and indirect). (v) Full convertibility of Rupee on current account.
  • FEMA (Foreign Exchange Management Act) came into force in July 2000. This FEMA has replaced Foreign Exchange Regulation Act, 1973 (FERA-1973).
  • Under FEMA provisions related to foreign exchange have been modified and liberalised so as to simplify foreign trade and payments. FEMA will make favourable development in foreign Money Market.

Trade Organizations

  • International Monetary Fund (IMF) was established on 27th December, 1945 on the basis of decision taken in the Bretenwood Conference and it started functioning w.e.f. 1st March, 1947.
  • The function of IMF is to encourage financial and economic Co-operation between member countries and to extend world trade.
  • International Bank for Reconstruction and Development (IBRD) was established in 1945.
  • IBRD along with other institutions is also called World Bank. The other institutions are International Finance Corporation, International Development Agency and Multilateral Investment Guarantee Agency.
  • Presently, it is helping member countries in capital investment and encouraging long-term balanced development.
  • General Agreement on Tariffs and Trade (GATT), came into being on 30th October, 1947 and started functioning from January, 1948.
  • The principle of GATT was — equal tariffs policy, to remove quantitative ban and disposal of business dispute in a democratic way.
  • On 1st January, 1995 the World Trade Organisation took over the place and position of GATT.
  • The Headquarter of WTO is in Geneva and the number of its member countries in the year 2003 was 146. India is also a member of it.

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Important Questions on Foreign Trade

Questions 1
From which year was the FEMA Promulgated? [MPPSC (Pre) 2005]
(A) 2003
(B) 2002
(C) 2000
(D) 1999

Questions 2
Which of the following authority sanctions foreign exchange for import of goods? [UPPCS (Pre) 2011]
(A) Any nationalised Bank
(B) Exchange Bank
(C) Reserve Bank of India
(D) Ministry of Finance

Questions 3
Which of the following statements is correct about the Balance of Trade of India? [RAS (Pre) 2016]
(A) India’s trade balance remained negative for the entire period from 1949-50 to 2015-16
(B) India’s trade balance remained positive for the entire period from 1949-50 to 2015-16
(C) India’s trade balance remained negative for the entire period from 1949-50 to 2015-16 except two years 1972-73 and 1976-77, when it was positive
(D) India’s trade balance remained positive for the entire period from 1949-50 to 2015-16 except two years 1972-73 and 1976-77, when it was negative

Questions 4
The term ‘Balance of Payment’ is used in relation to which of the following? [UPPCS (Mains) 2011]
(A) Annual sale of a factory
(B) Tax collection
(C) Export and Imports
(D) None of the above

Questions 5
The maximum limit of Foreign Direct Investment (FDI) in public sector banking is [HPPSC (Pre) 2011]
(A) 20%
(B) 50%
(C) 33%
(D) 49%

FAQs on Foreign Trade

Under free exchange market the rate of foreign exchange is determined by

Under free exchange market the rate of foreign exchange is determined by Purchasing Power Parity Theory.

What is development?

The development is the reduction in the value of the currency in terms of gold.

What have been the reasons for the deficit in India’s Balance of Trade in the Past?

Following are the reasons for the deficit in India’s trade balance in the past-
1. Very large rise in imports
2. Modest growth of exports
3. High-cost and low-quantity production

Which sector in India attracts the highest FDI equity flow?

The service sector in India attracts the highest FDI equity flow.

A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economics like UK and France why?

A great deal of Foreign Direct Investment (FDI) to India comes from Mauritius than from many major and mature economics like UK and France because India has double taxation avoidance agreement with Mauritius.

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Last updated: August 17, 2023 Updated on 10:03 AM