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How is India’s trade landscape shaping up for the future?

After independence in the late 1940s up to the early 1990s, India’s trade policy was transformed: from protectionism to a liberalised economy. As the country moves towards greater global economic integration, remaining challenges include improving infrastructure and diversifying trade relations.

Since gaining independence in 1947, India’s trade policy has undergone a dramatic transformation: from strong protectionism in the early post-colonial decades to a liberalised economy following a series of reforms made in 1991 under the premiership of Manmohan Singh. Today, with merchandise exports valued at $451 (£350) billion, up from $314 (£167) billion a decade ago, and initiatives like the ‘production-linked incentive’ (PLI) scheme, India is building a future trade landscape that aims to blend its strong local ecosystem with global markets, and which responds effectively to a variety of infrastructural and logistical challenges.

India’s robust local trade ecosystem reflects its diverse industries – from petroleum goods, through engineering machinery, to iron and steel – all of which have thrived over the years. But the journey towards increased globalisation faces challenges that include high costs of logistics and an underused coastline.

Initially after independence, India adopted a protectionist trade stance with high import barriers (to encourage ‘import substitution’ by local producers) and strong industrial regulation. But the 1991 reforms marked the shift to a liberalised economy, encouraging openness to trade and foreign investment. This reflects India’s evolving approach to balancing domestic industry protection with global economic integration. The subsequent three decades have seen these reforms take hold.

How did India's trade policy evolve after independence?

Since 1947, India has made an impressive transformation of its trade policy and practices. Immediately post-independence, the country adopted a hard narrative of protecting domestic industries, influenced both by its past colonial experience as well as the desire to foster self-reliance. As a result, the period was characterised by extremely high regulation of industries and control over integration with the wider world.

India’s merchandise exports in 1948 were worth just over $1 billion, with the country experiencing a marginal trade deficit (UNCTADstat). Major exported items at that time included jute, cotton, oil seeds and tea (Subrahmanyam, 1948), while imports were mostly dominated by food grains and basic consumption goods, along with intermediate products such as mineral oils (Kumarasundram, 1955).

In the first few decades after independence, at least until the late 1980s, Indian industry was mostly dominated by what was called the ‘licence raj’ – a system in which businesses required official permits to operate, further worsened by production quotas. This meant that India had a highly regulated economy, the backbone of which was the Industries (Development And Regulation) Act of 1951. Overall, the economic thinking of that era – which in many cases favoured state intervention – played a major part in India’s industrial and trade policies.

What were the limitations of India’s early economic model?

It became increasingly clear by the 1980s that this model had grave limitations, as the economy experienced what became known as the ‘Hindu rate of growth’ during the first three decades of independence (Nayar, 2006). Indian GDP grew at an average annual rate of 3.6% during this period (Economic Survey, 2020-21). The country’s trade deficit also widened from approximately $0.1 billion in 1948 to $6.3 billion in 1980.

Realising the limitations of the system, the government started to liberalise the economy gradually in the 1980s, although the reforms of that decade were more pro-business than pro-market. The former type of reform focuses more on increasing the profitability of established enterprises, while the latter is more concerned with removing the overall barriers present in markets so as to encourage new entrants (Rodrik and Subramanian, 2004). Indian reforms in the 1980s aimed to get existing businesses to grow – and to do so quickly.

What triggered India’s shift towards economic liberalisation?

The turning point in India’s journey toward economic liberalisation was the set of reforms announced in 1991. The country faced a severe balance of payments crisis at that time, with foreign exchange reserves only enough to cover imports for three weeks. The licence raj was dismantled, trade was liberalised and there was a broader shift towards a market-oriented economy, effectively opening India to global trade and investment. From crisis came opportunity.

Figure 1: India’s trade as a share of GDP (1960-2022)

Source: World Bank
Note: Trade here is the sum of exports and imports of goods and services measured as a share of gross domestic product. This is an important parameter to showcase the trade openness of a country.

An important aspect of the reforms was the emergence of the services sector, especially the information technology industry, which, on the back of the so-called ‘Y2K problem’, saw exponential growth. Today, the services sector contributes over one-third of India’s total exports.

Overall, India’s trade policy is continuing to evolve, balancing the needs of a developing economy with the importance of global integration. Embracing globalisation can significantly benefit economies like India’s, enhancing economic growth and elevating living standards through the benefits of international trade. It can also encourage infrastructural and regulatory improvements, pushing up overall efficiency and competitiveness (Sutherland, 2002).

What is the current landscape of India's merchandise trade?

Since the 1991 reforms, India’s trade has undergone significant transformations. Much has also changed over the past decade, with the country experiencing major economic shifts associated with wider global events such as the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine in early 2022.

Exports are on the rise. India’s merchandise exports increased from $314 billion in 2013/14 to $451 billion in 2022/23, growing at an average annual rate of 5%. One of the biggest contributors to export growth has been petroleum products, which had a share of over 21% in 2022/23, backed by high crude oil prices and strong global energy demand (caused in part by supply chain disruptions arising from various conflicts). Industries such as telecoms instruments and aluminium products have also shown strong export growth over the last ten years.

Imports have grown at an even faster annual pace. Indian imports grew by 7% annually over the past decade, rising from $450 billion in 2013/14 to $716 billion in 2022/23. This led to a widening of the country’s trade deficit in merchandise to $265 billion in 2022/23, up from $136 billion a decade ago. In current account terms, the deficit is close to 2% of GDP. It is important to mention that the current account includes the trade of goods and services in addition to primary and secondary income, and India enjoys a surplus in trade of services of $143 billion, along with a net positive secondary income of $100 billion (Reserve Bank of India, RBI, 2023).

How do oil and electronics imports reflect India's trade dynamics?

India has historically relied on imports of crude oil to meet its energy demand. Approximately 23% of merchandise imports in 2022/23 were driven by crude oil. This demonstrates the extent to which the country is buying in inputs from abroad (crude oil) and using them to produce other goods (refined petroleum products) to then export overseas. Economists call this ‘value-chain linkage’.

Another important industry to highlight is electronics, where India’s trade deficit has more than doubled in the last decade, reaching over $50 billion in 2022/23. This flags a significant gap in domestic manufacturing capabilities, especially in the high-tech sectors. In terms of technologies like computers and microchips, India is behind in terms of its balance of trade.

Figure 2: The current state of India’s merchandise trade: a snapshot

Source: Directorate General of Commercial Intelligence and Statistics, Government of India

How is India expanding its global reach?

In terms of export destinations for Indian goods and services, the United States and the United Arab Emirates (UAE) have remained key markets, with India diversifying in terms of export destinations over recent years. More than 17% of the country’s exports of goods went to the United States in 2022/23. But recently, destinations such as Bangladesh, Indonesia and the Netherlands have grown among India’s export preferences. The web of trade is expanding.

For imports, China remains a dominant supplier to the Indian market. But the recent spike in imports from Russia in 2022/23, especially since the invasion of Ukraine, suggests a strategic shift, which is likely to have been driven by increased oil imports. This highlights another side to increased globalisation – a closer connection and vulnerability to international events.

Russia’s share in India’s total merchandise imports was 6.5% in 2022/23, with over two-thirds of this coming from crude oil imports. From being the 20th largest import source for India in 2021/22, Russia became the fourth largest in 2022/23, purely on the back of Indian oil companies getting better deals from Russian suppliers. Russia ended up meeting 20% of India’s crude oil demand in 2022/23. How this plays out in terms of India’s international reputation remains to be seen.

How is India's new approach to trade agreements shaping its global economic relations?

India’s journey with respect to the signing of international trade agreements has been a combination of strategic shifts and evolving economic narratives. To date, the country has signed 13 regional/free trade agreements (FTAs), all differing in their nature and scope. The partners include Japan, South Korea and Sri Lanka, along with the Association of Southeast Asian Nations (ASEAN) and, more recently, Australia, the European Free Trade Association (EFTA), Mauritius and the UAE.

India’s focus has traditionally been on the eastern front. This has changed in recent times, as the country is pushing to sign more agreements with countries in the West. In addition to the FTAs, India has signed preferential trade agreements (PTAs) with regions such as Mercosur (Argentina, Bolivia, Brazil, Paraguay and Uruguay).

The initial agreements, such as the South Asian free trade area (SAFTA) and the ASEAN-India FTA, were executed with the objectives of fulfilling these untapped markets. But India was faced with limited success in this regard, especially in the cases of ASEAN, Japan and South Korea.

Figure 3: India’s worsening trade deficit with trade agreement partners

Source: ITC Trade Map, United Nations

These experiences pushed India to recalibrate its approach to signing FTAs. As a result, the country was more cautious about signing any FTAs in the 2010s. But in recent years, Indian policy-makers have renewed their focus on negotiating comprehensive deals with the developed world, with Australia, EFTA and the UAE being the latest partners.

Given India’s past experiences, policy-makers were extremely careful with respect to the clauses included in the latest round of trade agreements. For example, the India-UAE ‘comprehensive economic partnership agreement’ (CEPA) has stringent product-specific rules of origin, where the partner country’s goods should have at least 40% domestic value content. This was done to prevent third-party goods routed through the partner country from getting preferential treatment.

Currently, India is also negotiating trade agreements with the European Union and the UK, with discussions with the latter now in their final stages. As of 2023, 13 rounds of negotiations have taken place between India and the UK government. While both countries are hoping to conclude the talks in the coming months, issues related to business mobility, automobiles, Scotch whisky, pharmaceuticals and rules of origin remain unresolved. Nevertheless, India's recent approach to exploring potential economic agreements with the West marks a new chapter in its trade policy.

How is India addressing its trade challenges and capitalising on new opportunities?

In terms of its trade landscape, India has potential on the global stage. But the country is currently navigating a range of challenges and opportunities that will significantly affect its influence in global commerce. The path to globalisation is not entirely straight.

Over the past decade or so, there have been substantial improvements in Indian infrastructure and logistics. India’s overall logistics performance index (LPI) score has risen from 3.08 in 2014 to 3.40 in 2023, and its global rank has improved from 54th to 38th.

But critical gaps still remain to be resolved in customs efficiency and infrastructural quality. For example, delayed clearances and inadequate handling facilities at ports add to costs. These challenges not only elevate trade costs, but also hinder the timeliness and reliability of shipments, which are important for maintaining competitiveness in the export market. Becoming a global player means raising standards at home.

Figure 4: India’s improving score on the logistics performance index

Overall LPI3.083.4054th38th
International shipments3.203.5044th22nd
Logistics quality and competence3.033.5052nd38th
Tracking and tracing3.113.6057th35th
Source: World Bank Logistics Performance Index

Further compounding these long-standing issues are short-term global issues such as the recent Red Sea crisis, which has led to a big rise in freight rates, increasing by up to 600% in some cases. This particular instance also highlights the sensitivity of India’s trade networks to global geopolitical tensions.

In addition, despite showing signs of improvement, India’s port infrastructure is yet to meet the global standards required for handling ultra-large vessels. This weakness not only prevents India from drawing on economies of scale, but also becomes a barrier to the country’s aspiration to integrate deeper into global value chains. It is one thing to have trade agreements in place, but the country needs the physical port facilities to match its ambitions.

In contrast, the National Logistics Policy (NLP), which was launched by the government in 2022, has emerged as a vital opportunity. This policy aims to reduce Indian logistics costs, pushing them down to the level of developed nations.

NLP strategies include improving transport efficiency, facilitating private investment in warehousing, and enhancing supply chain reliability through digitalisation. It focuses on multi-modal infrastructure development, promoting standards in warehousing, and streamlining regulatory processes for smoother operations. If successful in its objectives, the NLP will enhance the competitiveness of Indian exports in the global market. Ambition could soon turn to reality.

How can India's digital infrastructure transform its international trade prospects?

Another significant opportunity for India lies in exporting its successful ‘digital public infrastructure’ (DPI) model to other developing (as well as developed) nations. This is especially the case with its payment mechanism known as the ‘unified payments interface’ (UPI). Recently, this payment service was launched in France. This not only enhances India’s influence, but also opens new trade avenues through technology exports.

The exponentially growing field of artificial intelligence (AI) offers further transformative prospects for India’s trade. AI’s utility in the fields of predictive analytics, supply chain optimisation and reducing trade costs could revolutionise the way in which trade is happening in India. Since the country is embracing AI’s usage in various segments, this could lead to efficiency in its trade operations.

What lies ahead for India's trade ambitions in the global economy?

As India progresses towards making a mark on the global trade stage, the future holds a blend of ambitious targets and transformative policy that could redefine the country’s economic landscape. The newly announced Foreign Trade Policy (FTP) 2023 aims to elevate India’s exports (goods and services) to $2 trillion. And unlike previous foreign trade policies, which had a five-year target date, this FTP has deliberately been kept dynamic and open-ended to address emerging trade needs.

Some of the themes central to the FTP 2023 include streamlining processes, improving the ease of doing business, and focusing on emerging areas like e-commerce and high-end technologies. The FTP promises process re-engineering and automation for a more seamless trade experience and acknowledges the importance of e-commerce exports.

The policy also stresses the vitality of district-level exports, aiming to build a robust local trade ecosystem. It seeks to do this by identifying and promoting district-specific products and services for export, as well as the formation of district export promotion committees. This is to be supplemented by conducting outreach activities, including buyer-seller meetings, trade fairs and workshops, to bring more exporters on board. Ultimately, the goal is to tap into the unique strengths of each district to enhance the country’s overall export capability.

Another cornerstone of India’s future trade landscape is its PLI scheme. Launched in 2020 and spanning 14 sectors, the aim of the scheme is to bolster domestic manufacturing and reduce import dependency.

In contrast with the post-independence protectionist era, which mostly focused on high tariffs and trade barriers for import substitution, the PLI scheme encourages modern and competitive manufacturing sectors. It does so by giving companies incentives based on their incremental sales of goods over a specified base year. The scheme has already begun to show success in sectors like electronics. Its impact could be further magnified by the ‘China+1 manufacturing strategy’ of the global players looking for greater diversity in their manufacturing bases. As nations look to diversify away from China, India could stand to win big.

Overall, as India moves towards its ambitious trade objectives, the road ahead has both opportunities and challenges. The integration of market-friendly policies and innovative solutions in various sectors offers a promising path for growth and market expansion. But it also demands a cautious approach with respect to addressing infrastructural gaps and adapting to the evolving global economic climate. The country’s role on the global stage looks set to grow and expand, but by how much is partly in the hand of its policy-makers.

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Author: Mayank Khurana
Photo: Kochi, Kerala, India-October 8 2022; A Ferry boat carrying the daily wage lobors for work in the Shipping Dock yard at Kochi seacoast in Kerala, India. Credit. Priya darshan on iStock.
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