8. India’s Foreign Trade: Balance of Trade, Export and Import Baskets

India’s Foreign Trade: Balance of Trade, Export and Import Baskets

Prior to 1947, India’s trade was a typical colonial trade, in which we used to supply raw materials to our colonial master and imported the manufactured goods. So, naturally the industrialization at home was not permitted. The indigenous handicrafts suffered because of the competition from the British manufactured products as well as British traders located in India as well as abroad.

The colonial pattern of trade was to be changed after independence.

·         The first major challenge was the increase in the production capacity of the country. So, this led to import of the heavy plants and machinery which was called the “developmental Imports”.

·         To maintain the productive capacity of the country, the objects such as machines were imported and this was called “maintenance imports”.

The above two similar kinds of imports were vital for a developing country like ours which just embarked on the path of the economic development.

Apart from that, India needed to import lots of food grains in the beginning. Since, the food grain production in the country was so less to fulfil needs. The import of food grains was also necessary to contain the inflation in these consumer goods.

India when became independent was heavily dependent upon the imports. The higher imports and negligible exports mean a pressure on the balance of trade. The result is pressure on the economy. So, there was need to encourage the exports. The imports were inelastic, and to fight with the pressure of the foreign debt, the country needed to boost its exports.

Balance of Trade

Balance of Trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. A positive balance is known as a trade surplus if it consists of exporting more than is imported; it is also known as favourable trade balance. A negative balance is referred to as a trade deficit.

Factors that can affect the balance of trade include:

·         The cost of production (Land, Labour, Capital, Taxes, Incentives, etc.) in the exporting and importing countries

·         The cost and availability of raw materials, intermediate goods and other inputs;

·         Exchange rate movements;

·         Multilateral, bilateral and unilateral taxes or restrictions on trade;

·         Non-tariff barriers such as environmental, health or safety standards;

·         The availability of adequate foreign exchange with which to pay for imports; and

·         Prices of goods manufactured at home (influenced by the responsiveness of supply)

·         The stage in business cycle such as recession, boom, stagnation etc.

Historical Trends in Trade Balance

In 1949-50, India’s exports were worth Rs. 485 Crore and the imports were worth Rs. 617 Crore. Thus, the country started with negative trade balance of Rs. 132 Crore. Both exports and imports increased and the trade deficit also increased. India has a continuous trade deficit except only two years viz. 1972-73 & 1976-77 in which there were more exports than imports and a positive trade balance.

Post liberalization, the devaluation of Rupee and convertibility of Indian Rupee in current account tried to create a favourable environment but in the subsequent years, the trade deficit increased.