Ministry of External Affairs Government of India

India's International Trade: Trends and perspectives.

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  By: Amb (Retd) V.S. Seshadri
  Venue: National Academy Of Customs, Indirect Taxes And Narcotics (NACIN), Mumbai.
  Date: April 09, 2018
  

Members of the NACIN Faculty and dear officer trainees

It is a privilege and a honour for me to be here in your midst. You have all reached here after a rigorous selection process. You are going to be future guardians of our trade gateways . On the one hand you will seek to promote legitimate trade and secure rightful revenues. At the same time trade facilitation and speedy clearances are critical to make trade smooth and efficient. All of you will have a crucial role in pursuing these objectives in a balanced manner.

I will like to share with you some perspectives on recent trends in our external trade. My career in the Indian Foreign Service, much of which was spent on dealing with economic and trade policy issues, enabled me to observe international trade trends closely and participate in some of the negotiations. I will be speaking on the issues however not as an economist but as a former trade policy practitioner at a governmental level and as a former diplomat.

A key message that I wish to convey is that as a nation we have to vastly improve our standing in international trade. To the extent there can be an exertion among our future civil servants to improve India’s international trade performance, particularly exports, we can make significant progress.

What I propose to do is to give you a snapshot of trade trends and flag some of the key issues. I will also talk briefly about rules concerning international trade and regional trading arrangements. It is important to reflect on how India should formulate its approach- my intention is not necessarily to provide answers but to make aware of the general scenario in this important area. We could then have a discussion.

At the outset, we need to recognise that given India’s size and aspirations for development, our trade indicators are quite modest. While we are No.2 in the world in terms of population and No.7 in terms of nominal GDP, we only figure at No.19 in terms of exports with a 1.64 % share and rank No.13 in terms of imports with a 2.34 % global share. Our trade to GDP ratio at 39.8 per cent is relatively low at our level of development. India’s trade per capita is also only US$ 382 that is significantly less than the corresponding numbers for countries in the ASEAN or East Asian region.

Historically, India was a leading trading nation till the arrival of the East India company and the British colonial rule. From available accounts, during the medieval period, India’s exports far exceeded her imports both in the variety of items as well as in volume. They comprised a number of products including textiles, carpets, inlay furniture, hand crafted items, pearls and jewelry and spices. The chief articles of import were horses, from Kabul and Arabia, dry fruits and precious stones. India also imported glassware from Europe, high grade textiles like satin from West Asia, while China supplied raw silk and porcelain.

Export has been regarded a priority sector for the Indian economy by the present government as well as all the earlier governments. Exports are seen as a good source for ushering growth and for earning foreign exchange. Labour intensive exports can also contribute in a significant measure to employment generation. ‘Export or perish’ was in fact a slogan used in the early sixties by our first Prime Minister Nehru. While we have made considerable improvement over the years in our trade performance I would yet contend that our export numbers are rather low for a large country like India.

In diplomacy, and in foreign relations, the clout and leverage that a nation wields in maneuvering its way in world affairs can depend on various factors. In today’s world, strength in foreign trade is an important one. Greater economic inter linkages and commerce with lands near and far, contribute to strengthening partnerships and generating greater understanding. Exports, in particular quality exports, also bestow a certain brand value and reputation as we have seen in the case of Germany or Japan.

Against that backdrop let us briefly analyse India’s trade trends for the last twenty years or so.

• India’s exports were US$ 18 billion in 1990-91 and it took almost ten years to double to US$ 36.8 billion in 1999-2000. And in those years our share of world trade was less than 1 %.
• While our major economic policy reforms began in 1991, in terms of dismantlement of the so called license raj, but serious reforms in trade policy came much later. Quantitative restrictions on imports were done away with only in 2001 and import duties on most items were also gradually reduced mainly thereafter.
• And the effect of these reforms, coupled with measures taken by our industry, saw an impact on trade. From 2002-03 onwards exports began doubling every three years.

Table 1. India’s total exports and importsYear India’s total exports (in US$ billions) India’s total imports (in US$ billions) Balance of trade

Year	India’s total exports (in US$ billions)	India’s total imports (in US$ billions)	Balance of trade (in US$ billions)
2000-01	44.56	50.54	-5.98
2001-02	43.83	51.41	-7.58
2002-03	52.72	61.41	-8.69
2003-04	63.84	78.15	-14.31
2004-05	83.54	107.13	-23.59
2005-06	103.09	129.69	-26.61
2006-07	126.41	187.73	-59.32
2007-08	163.13	251.65	-88.52
2008-09	185.29	303.69	-118.4
2009-10	178.75	288.37	-109.62
2010-11	249.82	369.77	-119.95
2011-12	305.96	489.32	-183.36
2012-13	300.4	490.74	-193.34
2013-14	314.41	450.19	-135.78
2014-15	310.34	447.96	-137.62
2015-16	262.29	381	-118.71
2016-17	276.28	384.31	-108.03

* The financial crisis in 2008/09 did slow this trend somewhat. The exports also slightly declined in 2009-10. They however dramatically picked up in the next two years. Overall, the ten-year period from 2001-02 onwards, up to 2011-12, were in fact very good years for India’s exports when it rose by seven times. Of course, imports rose even faster and went up by nine times. And you can see that our trade deficit also climbed up.

* After 2011-12, there has been a global slowdown. Our exports have really not gone much above the US$ 300 billion mark that was reached in 2011-12. In fact, in 2015-16 there was a substantial decline by 15 per cent or so. While there has been some revival in 2016-17 and 2017-18 it seems quite likely, as per present assessment, that even in 2017-18 our exports may not exceed US$ 314 billion reached in 2013-14.

* Partly, this owes to the global slowdown, in part also to decline in petroleum prices (in the last couple of years) that have a prominent part both in our exports and imports. Some analysts believe that this is also as a result of loss of India’s relative competitiveness. The reasons cited here include higher wage growth, a stronger rupee and infrastructure not keeping pace with growth. Certain developing countries in ASEAN, such as Vietnam and Cambodia, have been able to buck the trend and even others like China or Thailand or even Bangladesh witnessed less steep decline, in the period since 2014.

Table 2: Sectoral composition of India’s exports in millions of US dollars

 

	2000-01	2005-06	2010-11	2013-14	2016-17
Textiles and garments	11,984 (26.9%)	17.516 (17%)	27.411 (11.0%)	35,458 (11.3%)	35,923 (13%)
Gems and jewelry	7,384 (16.6%)	15,529 (15.1%)	40,509 (16.2%)	41,692 (13.26%)	43,574 (15.77%)
Chemicals and allied products	6,177 (13.9%)	15,619 (15.15%)	30,855 (12.35%)	43,994 (14.0%)	45.840 (16.6%)
Engineering goods	5,673 (12.73%)	19,303 (18.7%)	49,815 (19.9%)	61,629 (19.6%)	67,061 (24.27%)
Agriculture	3,880 (8.7%)	7,219 (7.1%)	17,346 (6.9%)	32,387 (10.3%)	24,699 (8.93%)
Leather products	1,944 (4.4%)	2,698 (2.6%)	3,909 (1.6%)	5,714 (1.82%)	5,327 (1.93%)
Petroleum products	1,892 (4.2%)	11,640 (11.3%)	41,480 (16.6%)	63,177 (20.1%)	31,704 (11.47%)
Marine products	1,721 (3.9%)	1,589 (1.5%)	2,623 (1.05%)	5,016 (1.6%)	5,920 (2.14%)
Ores and minerals	1,152 (2.6%)	6,164 (6.0%)	8,661 (3.46%)	5,631 (1.79%)	3,205 (1.16%)
Electronics	1,120 (2.5%)	2,268 (2.2%)	8,285 (3.32%)	7,703 (2.45%)	5,696 (2.06%)

* Looking at our imports of key items, their relative ranking has not changed much over the years with petroleum crude being the main item. Varying crude prices do however make a difference in the share from time to time.

* Another major item of import is gold and rough diamonds. Some of these imports are for domestic use and the rest are processed for export as cut and polished diamonds or studded jewelry.

* Imports of machinery, metals and chemicals- in the form of capital goods or intermediate products form a large part of our imports. They all feed into our industry. Fertiliser imports are also significant.

* Electronics imports have seen a sharp rise in recent years. And this has happened particularly with China that accounts for imports of more than 50 per cent of mobile handset imports into India. I would stress here that the excessive dependance on imports from China is a factor that also has a security dimension that needs to be analysed with great care. Of course, over 80 per cent of imports from China fall into the category of capital goods or intermediate goods and these being available at competitive rates from China are at one level useful for India’s manufacturing sector to meet domestic demand and for exports.

* And then there are imports of agricultural items - particularly pulses and edible oil - items on which we are somewhat import dependent.

What emerges from this brief overview is that as we look into the future, with a growing domestic population and rising consumption, our import needs will only rise steadily. There is also the need for modern defense and security equipment that are still significantly imported. Our import requirements, be it petroleum products or capital and intermediate goods or agricultural essentials or even gold will only expand. We already however have a significant level of trade deficit on merchandise account. It is absolutely essential therefore that we rapidly expand our merchandise exports.

Table 6: Leading exporters and importers of commercial services

	1997-98	2000-01	2005-06	2010-11	2014-15	2016-17
EU	26.83	23.99	22.53	18.43	15.89	17.01
Rest of Europe	2.02	1.91	1.62	1.54	2.23	2.19
Africa	5.48	5.33	6.76	7.86	10.57	8.36
North America	20.91	22.82	18.25	11.02	15.3	17.3
Latin America	1.69	1.86	2.47	3.73	3.71	2.62
Oceania	1.48	1.12	0.97	1.0	1.03	1.22
ASEAN	7.08	6.53	10.09	10.25	10.25	11.24
Northeast Asia	15.67	14.09	15.73	14.39	12.17	12.55
West Asia	9.93	11.32	14.67	20.1	19.48	18.02
South Asia	4.69	4.38	5.38	4.66	6.59	6.91

Of course, the situation is somewhat better in respect of trade in commercial services. Here India figures at No.8 globally with an export level of US$155 billion in 2015. We are also No.10 in imports with an import level of US$122 billion. Our shares of exports and imports are also higher than in the merchandise trade. And the main services which make a difference is our export of computer services and computer enabled business services which add up to over US$100 billion or so annually. And much of these exports are directed towards western developed markets.

On the other hand, we are a substantial importer of transportation services apart from financial services, purchase of intellectual property etc. While we have an overall surplus of US$ 30 billion or so on services trade, here again pressures are building on the IT industry. Recent developments in the form of restrictions on visas for our computer professionals and the onset of automation and Artificial Intelligence whose potential impact is unknown have created uncertainties.

Given this backdrop I would submit that the need for an activist export effort is crucial not only towards consolidating existing exports and markets but also finding new value added products for export. In fact, the Government itself had in 2015, before the slowdown showed its full impact, came out with a new Foreign Trade Policy for 2015-20 to more or less double trade in goods and services from US$465 billion to US$900 billion. Rightly it also recognised the need to address infrastructure bottlenecks, high transaction costs, complex procedures, constraints in manufacturing and inadequate diversification of our services exports.

All this require enormous effort and coordination between the government and the industry. The task is challenging but there have been some areas where we have seen limited successes before. A striking example is that of refined petroleum products that is now a leading item of export that was not the case in the nineties. Setting up world class refineries at port locations has enabled export of these products at competitive prices despite strong international competition. Some may rue about limited value addition over imported crude. Their contribution to exports is however evident even if it is not a labour intensive sector. They form a lead item in our export basket today.

A recent issue of ‘Economist’ also elaborated at great length how Welspun in Anjar is the predominant global source today for towels. The diamond and jewelry sector has also continued to evolve from mere cutting and polishing to studded jewelry with significant technology infusion in design. This is a skill intensive sector. It is also welcome to see that the Gem and Jewelry export promotion council has talked of a target of US$ 60 billion by 2022.

Some engineering, automotive, pharma and agricultural items can also be cited among export successes in recent times even as they are still limited.

Several value-added products could potentially enter the export basket in a major way. We export crude granite to China which in turn processes it further and exports as granite tiles to several countries. We export shrimps to Vietnam which adds value to it in the form of breaded shrimps or skewered shrimps and sells it to Japan. Can we not do it ourselves? A good share of our steel export is in the form of pig iron or ferro chrome or ferro manganese. Most higher end steels are imported. We export Aluminum ingots but import aluminum coils or sheets. We export refined copper but import copper foil and concentrates. Similar is the case with Zinc or lead. We export raw cotton and cotton yarn much of which can go as finished fabrics or garments. Within garments a good share of our exports fall under informal wear but not formal wear that bring in higher returns. There could be many more examples including in agriculture related products.

Let us be clear. We cannot copy the Korean, the Japanese or the Chinese models. We have to fashion our own depending on our strengths and factor endowments. But it is very important to urgently to try hard to build our own model that can in the next several years rapidly expand our exports.

Will our private sector get interested in such ‘Make in India’ value addition ventures? These will involve substantial investments. They will also need to be located suitably so that transaction costs are minimal and shipping and other connectivity high. Government support and some concessionary bank financing will be essential to make it happen. Labour laws may also need suitable adjustments.

Some labour intensive foreign investments in China are getting relocated to Vietnam or other sites because of higher wages. A conducive and trade facilitating manufacturing environment can attract them to India.

The question arises if India itself will be competitive still for large scale labour intensive manufacturing. The annual Economic Survey brought out by the government in 2016-17, in its Chapter 7 captioned ‘Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?’ had asked this question and dwelt upon the challenges towards enhancing India’s exports in these two important labour intensive sectors. It has determined that there is still a narrow window of opportunity still available for India to make good in these sectors. It has suggested their focused promotion particularly considering the externality generating attributes they have like employment, exports and social transformation.

Further exploring markets with untapped potential should be another key element of the strategy. Noteworthy here is that some of our markets in Latin America, Africa and South Asia as also Turkey that have bucked the trend of declining Indian exports in recent years.

Facilitating border trade with our neighbours, can bring significant gains particularly in trade with Bangladesh, Myanmar and Nepal. This would involve taking actions both on the soft and hard infrastructure aspects to ensure a truly single window clearance with adequate back up logistic linkages and efficient transit arrangements. The setting up of Integrated Customs stations in various border locations currently underway offers the opportunity to make this happen.

To be successful in export is dependent in turn on the competitiveness of the country in specific items of export. If you were to look at the comparative analysis of global trade figures then India comes as one among the top ten exporters only in three or four broad areas: gem and jewelry, textiles and garments, pharmaceutical products and leather items. While we have made forays in a number of other areas including automobile parts and vehicles, steel, marine products and certain agricultural items we are still not among the top rankers. Government’s programs like Make in India, Start up India and Digital India along with skill development efforts, it is hoped will help us to move on these further.

It is not enough however if you have a competitive product. The entire supply chain has to be quick, cost effective and smooth. This requires efficient trade infrastructure and connectivity with trade being facilitated at the port. Here again the government is trying to implement various programs aimed at expanding the capacities of our ports, promoting growth corridors like the Delhi-Mumbai corridor and the Chennai-Bengaluru corridor etc., apart from various SEZs. The trade facilitation program is also aimed at expedited clearance of goods at ports and airports with the use of single window clearance, risk assessment procedures and faster track clearance for authorised exporters etc., Your role is crucial here. It is also important that the industry takes more interest on all this and not just be preoccupied with the domestic market.

Having a competitive product that is also transported efficiently to the port and cleared for export is only half the story. You also need assured entry or access for the product in the country to which it is exported and a buyer on the other side. India’s embassies abroad have commercial wings whose task is to help our exporters find prospective trade partners. They also facilitate visits of our trade delegations and undertake participation in trade fairs or hold other promotional events.

And an important aspect to note is that each market is unique and a marketing strategy and even product strategies will have to be different for different markets. How you promote and sell in Japan is very different from US or Europe. Several of our pharma companies that have been quite successful in the west for example have not done well in Japan where you have to pay close attention to even packaging and presentation. An Indian pharma company Lupin for example has been able to do better than others because they have an investment in Japan and a Japan dedicated facility in Goa matching their standards. Similarly TCS and Mitsubishi have collaborated to set up a Japan dedicated IT services center in Pune that is known to be facilitating greater access into that market. Some markets need greater gestation time and trust building and that needs cultivation. Here again our Missions abroad can be a good source of advice and information.

The other aspect is market access in foreign markets and what are the entry norms and tariffs and how predictable are they. This needs some understanding of the multilateral trade rules and how it has evolved over the years.

The international trading system is regulated by the World Trade Organisation (WTO) of which India is a founder member. It came into being in 1995 but its precursor GATT was in existence from 1947. It sets down rules as to how goods or services from one party will be treated in another that brings predictability and stability to trade. As prospective custodians of our customs gateways, particularly those of you who may have to deal with foreign markets, be it relating to trade or investment or intellectual property rights, it is very important that you have a good understanding of international trade rules. While a full appreciation of the corpus of WTO agreements can easily cover a semester’s course, what is noteworthy are two simple but fundamental principles- The Most Favored Nation or MFN treatment and the other is National Treatment.

The MFN treatment basically means that every WTO member will give the product of every other WTO member, say A, the same treatment that it accords to other WTO members B or C. There will be no discrimination shown between members. The National Treatment principle specifies that after the entry of another member A’s product into a country B, after payment of border customs duties, there will be no discrimination between the imported product from A and any like local product in country B. You cannot for example say for a local product I accept a lower standard but I insist on a higher standard for an imported product or levy a higher internal tax like GST on an imported product.

There are also WTO rules regarding customs tariffs, subsidisation, dumping, product standards and regulations and trade facilitation aspects.

And of course there is the World Customs Organisation headquartered in Brussels which seeks to promote security and facilitation of international trade, including simplification and harmonization of Customs procedures. I am sure you will be briefed separately and fully on its role and functions. So I will not go into that.

In the case of trade in services again there are rules regarding the regulatory framework and market access. WTO also prescribes minimum standards for intellectual property Rights- patents, trademarks, copyrights, commercial designs, industrial secrets and Geographical indications.

The jewel in the crown of WTO is its dispute settlement mechanism that has mandatory jurisdiction. Suppose there is a trade dispute between countries A and B who are members of WTO- any of them can approach the Dispute Settlement Body of WTO that immediately leads to consultations, and if it cannot be resolved, it then goes for adjudication before a panel. The Panel holds hearings and then submits its findings to DSB. The Panel’s report has to be adopted by the DSB whose membership is all WTO members. The unique feature of DSB is that it works on the principle of negative consensus. Only if there is a consensus against the adoption of the Panel’s report will it be voted down. Otherwise the report is carried. A consensus against the report is most unlikely and so far, in the history of WTO, no Panel report has been overturned. There is however also an appellate stage which again operates on the same negative consensus principle.

India itself has used the DSB 21 times as a complainant and has been a respondent on 22 occasions. We have won in some disputes and lost in others. But the DSB has by now generally won the confidence of the WTO membership that it is a fair process. Importantly, it has also not shied away from ruling against developed countries. Of course, DSB is only at the level of state to state. If an individual Indian company is affected because of some arbitrary action taken by another country that is against WTO rules then the company will have to get the government of India to lodge a case and seek redressal.

WTO is also meant to be progressively evolving, including in the direction of further liberalisation of tariffs and market access for services. In 2001, the Doha round of trade negotiations was launched with this objective. But after so many years of negotiations there is now, more or less, a stalemate.

WTO members are unable to reach a consensus with wide differences between developed and several of the developing members particularly about agriculture products. The only agreement they have so far been able to work out has been on trade facilitation signed in 2013 that has become operational now. India has been actively implementing this and in fact there is a high level committee headed by the Cabinet Secretary overseeing it. Bringing down clearance time at the port or border trade posts and reducing transaction costs with facilities like single window clearance and efficient behind the border logistics can significantly enhance our trade prospects.

I must however mention here that India has played a prominent role in the discussions and negotiations in GATT and later WTO. It was able to do this, despite its relatively low share of world trade, because it was able to build coalitions with developing countries with similar interests. But with many developing countries enhancing their trade levels, their interests are now more varied and getting like minded countries together is not so easy. And from this point of view, again, India having a larger share in world trade becomes crucial because clout comes with share.

Another aspect that I wish to briefly touch upon, before I conclude, is that international trade rules are evolving even outside of WTO. In fact WTO itself allows two or more countries to come together and form a free trade area or regional trading arrangement or a customs union subject of course to some conditions. In such a case, the members of the FTA or an RTA get an exemption from the application of the MFN principle of non-discrimination. They can give more favorable treatment to the RTA members. The European Union is a prime example of an RTA which is also a customs union. The North American Free Trade agreement (NAFTA) is another. And India itself has over the years signed FTAs with several countries and in the region- with Sri Lanka, Singapore, Malaysia, Korea, Japan, ASEAN as a whole, South Asia as a whole., etc. We are also in the process of negotiating some more- with Thailand, Indonesia, European Union etc., as well as a mega FTA with all South East Asian and East Asian countries, called the Regional Comprehensive Economic Partnership (RCEP).

So, if you want to know about market access conditions for your company in any other country you will not only have to check that country’s WTO commitments but also the commitments it may have in its RTAs or FTAs including if any with India.

But allow me to go back to RCEP which is a proposed FTA of sixteen countries- the ten ASEAN countries and Australia, China, Japan, Korea and India- these negotiations are currently underway and are the most challenging for India. Many of you may have seen news reports about the nineteenth round of these negotiations held in Hyderabad some fifteen days ago. We are now in the fifth year of negotiations and considerable progress has been made. If successfully concluded, it will cover half the world population, 30 per cent of world GDP and a quarter of world trade. This regional grouping has several countries including China whose economies are some of the most competitive in the world. A great deal of planning and strategising by India will be essential to ensure that the final outcome is balanced and will secure us commensurate benefits.

You can ask why should India join RCEP if the negotiations are challenging. Here we come back to India’s role and what we aspire for in the global comity. India enjoys strategic and security partnerships with many countries in the Asia Pacific region. But somehow the economic interlinkages have not kept pace. RCEP could enable this catch up to happen and help build a further layer of integration with East and South East Asian countries on the economic front. It can also lend more substance to the Act East policy of the government. But success in respect of all this is predicated upon focused efforts being made to deliver on competitive exports.

The general outlook for international trade at present looks somewhat dim because the recovery after the slowdown has been patchy. China’s growth slowing down has also contributed. In recent months, the new Trump administration has also taken a ‘America first’ approach. President Trump’s first decision on assuming office in January last year was to get US out of the 12 member Trans Pacific Partnership agreement another mega FTA that had been concluded under US leadership under President Obama. He has also forced Canada and Mexico to agree on a renegotiation of NAFTA on which negotiations are to commence soon. His administration has also expressed a distinct preference for bilateral agreements. Trade was also a major issue for discussion when our Prime Minister when to US with US pushing for higher level of protection for IPRs apart from other market access issues. We ourselves have a complaint about our IT professionals not being given visas for fulfilling short term contracts. And most recently, President Trump has unilaterally imposed tariffs on certain items including from China and China is also retaliating. So, the trade world is only getting tougher. Many even wonder if globalisation is on the retreat. In these challenging times, it is important that both policy makers and the industry closely work together to strategise and devise ways forward. And I do not need to emphasise the valuable role that you as our trade sentinels can contribute to this effort in the coming years.