India’s External Sector and foreign trade: An overview

Foreign trade plays a vital role in the economic development of a country. It is a primary link of integration with the other world economies. India is no exception to it and being a developing economy, the foreign trade has long lasting ramifications on the economic health of the country. In recent times of slowdown across global economies, India is considered to be one of the most exciting markets for foreign trade with a large base of export and import centric industries. Considering the merchandise trade, India’s share in total world exports is 1.6% while that of imports is 2.4%. On the other hand, the share of services exports in the world is 3.2% and that of imports is 3.0%. In the fiscal year 2016-17 India’s external position appears robust having successfully weathered the sizeable redemption of Foreign CurrencyNon-Resident (FCNR) deposits in late 2016, and the volatility associated with the US election and demonetisation. The current account deficit has declined to reach about 0.3 percent of GDP in the first half of FY2017. Foreign exchange reserves are at comfortable levels, having have risen from around US$350 billion at end-January 2016 to US$ 360 billion at end-December 2016 and are well above standard norms for reserve adequacy.  In part, surging net FDI inflows, which grew from 1.7percent of GDP in FY2016 to 3.2 percent of GDP in the second quarter of FY2017, helped the balance-of-payments.

Merchandise Trade

Over the last ten years, India’s merchandise trade (on customs basis) increased manifold from US$ 195.1 billion in 2004-05 to US$ 764.6 billion in 2013-14. As per the World Trade Organization (WTO), India’s share in global exports and imports increased from 0.8 per cent and 1.0 per cent respectively in 2004 to 1.7 per cent and 2.5 per cent in 2013. Its ranking in terms of leading exporters and importers improved from 30 and 23 in 2004, to 19 and 12 respectively in 2013. While India’s total merchandise trade as a proportion of gross domestic product (GDP) increased from 29.0 per cent in 2004-05 to 41.8 per cent in 2013-14, India’s merchandise exports as a proportion of GDP increased from 12.1 per cent to 17.0 per cent during the same two time periods. There were considerable differences in the growth rates within the two time periods which owed largely to the global uncertainty, prolonged weakness in some areas, and volatility in global commodity prices since 2008. In particular, global crude oil prices were a major factor in the process of elevated levels of merchandise trade deficit.

Merchandise exports

The high growth in two years (2004-05 and 2013-14) led to overall exports crossing the US$ 300 billion mark. In 2012-13, though exports were still above the US$ 300 billion mark, growth in exports could not be sustained and marginally declined by 1.8 per cent. During 2013-14, however, exports recovered to post a growth of 4.7 per cent (US$ 314.4 billion). In 2014-15 (April-January), growth of exports moderated to 2.4 per cent (US$ 265.0 billion vis-à-vis US$ 258.7 billion in the corresponding period of the previous year).

Merchandise Imports

India’s merchandise imports grew by 28.2 per cent in 2010-11and the high growth continued through 2011-12 driven by broad-based expansion in imports of gold and silver, POL group and non-POL and non-gold and silver group. In 2012-13, there was only modest decline in the growth rates of gold and silver as well as non- POL imports, leading to continuance of elevated level of total imports of around US $ 490 billion. In 2013-14, in view of the sharp depreciation of the rupee owing to domestic and external factors, the government placed restrictions on gold imports which led to a sharp decline therein of 46.4 per cent. With domestic activity remaining weak, non- POL and non-gold and silver imports also declined by around 7 per cent, which along with the fall in gold imports led to overall decline in imports to US$ 450 billion.

Current Account Deficit

Despite moderation in India’s exports,India’s external sector position has been comfortable, with the current account deficit (CAD) progressively contracting from US$ 88.2 billion (4.8 per cent of GDP) in 2012-13 to US$ 22.2 billion (1.1 per cent of GDP) in 2015-16. The CAD further narrowed in 2016-17 (H1) to 0.3 per cent of GDP. In 2016-17 (H1), sharp contraction in trade deficit outweighed the decline in net invisible earnings. The downward spiral in international crude oil prices resulted in a decline in oil import bill by around 18 per cent which together with a sharp decline in gold imports led to a reduction in India’s overall imports (on BoP basis). The trade deficit declined by 23.5 per cent in April-December 2016 over corresponding period of previous year. During the first half of the fiscal year, the main factor was the contraction in imports, which was far steeper than the fall in exports. But during October-December, both exports and imports started a long-awaited recovery, growing at an average rate of more than 5 per cent. The improvement in exports appears to be linked to improvements in the world economy, led by better growth in the US and Germany. On the import side, the advantage on account ofbenign international oil prices has receded and is likely to exercise upward pressure on the import bill in the short to medium term.

Matter of concern

The net services surplus declined in the first half, as software service exports slowed and financial service exports declined.  Net private remittances declined by $4.5 bn in the first half of 2016- 17 compared to the same period of 2015-16, weighed down by the lagged effects of the oil price decline, which affected inflows from the Gulf region. Net services receipts declined by 10 per cent in H1 of 2016-17 despite increase in services receipts (4.0 per cent) as growth in services payments was higher (16 per cent). However, growth of receipts of software was marginal and financial services receipts declined. Subdued income conditions in source countries, particularly in the gulf region due to downward spiral in oil prices continued to weigh down on remittances by Indians employed overseas as private transfers moderated to US$ 28.2 billion in H1 of 2016-17 from US$ 32.7 billion in H1 of 2015-16.

Composition of Trade

Composition of exports

The commodity composition of India’s trade has undergone many changes since liberalization and has been driven by trade policy, movements in international prices, and the changing pattern of domestic demand. Manufactured goods constitute the bulk of exports — over 63 per cent in recent years, followed by crude and petroleum products (including coal) with a 20 per cent share, and agriculture and allied products with a share of 13.7 per cent share. The top seven product groups accounting for nearly 80.9 per cent of India’s total exports in 2014-15 (April-December) were: petroleum products (19.4 per cent share); gems and jewellery (13.0 per cent share);  griculture and allied products (12.0 per cent share); textiles and allied products (11.6 per cent share); chemicals and related products (10.1 per cent share); transport equipment (8.5 per cent share) and machinery (6.3 per cent share).

Growth in exports of petroleum and agriculture and allied products which had been in positive territory for the last four years, turned negative in 2014-15 (April-January). Gems and jewellery exports which exhibited a declining trend in 2012-13 and 2013-14, continued to register a declining trend in 2014-15.

In the case of electronic goods, there has been continuous decline in exports since 2012-13. During 2014-15 (April-January), some sectors like transport equipment; machinery, chemicals and related products, textile and allied products and base metals registered positive growth in exports. Marine products and leather and leather manufactures recorded relatively high growth in 2012-13, 2013-14, and 2014-15 (April-January). While the shares in terms of nominal value of exports (conversely imports) may be high in some sectors, the import (export) component may also be high and therefore it would be instructive to look at value added.

Composition of Imports

One of the major items in India’s import basket is the POL group, which accounted for 36.6 per cent of India’s total imports in 2013-14. POL imports surged with a growth of 46.2 per cent in 2011-12, mainly on account of significant increase in global crude oil prices vis-à-vis 2010-11. The growth in imports of POL moderated to 5.9 per cent and 0.4 per cent respectively in 2012-13 and 2013-14. There was moderation in international crude oil prices (Brent) from US$109.8 per barrel in the first quarter of 2014-15 to US$ 76.0 per barrel in the third quarter which resulted in the value of POL imports declining by 7.9 per cent in 2014- 15 (April-January). Capital goods imports are another major group which declined continuously from 2011-12 onwards. Within capital goods, imports of machinery registered positive growth in 2014-15 (April-January). Gold and silver imports accounted for 11.4 per cent of India’s total imports in 2012-13 and 7.4 per cent in 2013-14. These imports declined by 9.0 per cent and 40.4 per cent respectively in 2012-13 and 2013-14 but registered a positive growth of 8.0 per cent in 2014-15 (April-January). Imports of pearls and precious and semi-precious stones grew by 5.4 per cent in 2013-14 and declined by 3.9 per cent in 2014-15 (April-January).

Direction of Trade

There has been significant market diversification in India’s trade in recent years –a process that has helped in coping with the sluggish global demand, which owes to a great extent to the weakness in the euro zone. Region-wise, India’s export shares to Europe and America have declined over the years—from 23.6 per cent and 20.1 per cent respectively in 2004-05 to 18.6 per cent and 17.2 per cent respectively in 2013-14. Conversely, the shares of India’s exports to Asia and Africa have increased from 47.9 per cent and 6.7 per cent respectively in 2004-05 to 49.4 per cent and 9.9 per cent respectively in 2013-14. The change in direction immediately prior to the global financial crisis and since 2010-11 indicates the process of diversification underway. A comparison of India’s trade in the pre-crisis (2004-05 to 2007-08) and post-crisis period (2010-11 to 2013-14) shows that India’s exports and imports from Europe, the USA, and Singapore have declined, while its trade with Asia and Africa has increased.

In 2014-15 (April-December), India’s exports to the European region grew by only 0.2 per cent. India’s exports to Africa and America grew by 12.9 and 14.5 per cent respectively and to Asia, a major destination accounting for nearly 50 per cent of India’s exports, by 2.2 per cent in 2014-15 (April-December). Within Asia, India’s exports to South Asia grew by 23.8 per cent (mainly due to high export growth to Sri Lanka, Nepal, and Bangladesh) and 8.8 per cent in the case of West Asia-Gulf Cooperation Council (GCC) (UAE, Saudi Arabia, and others). India’s exports to other regions of Asia witnessed a contraction—declining by 4.4 per cent to North East Asia (consisting of China, Hong Kong, Japan), 7.2 per cent to the Association of South East Asian Nations (ASEAN) (consisting of Singapore, Indonesia, Thailand, Malaysia), and 8.5 per cent to Other West Asia (Iran, Israel, and others)—in 2014-15 (April-December). Countrywise, India’s exports to the USA and UAE— major destinations with a share in India’s total exports of 12.5 per cent and 9.7 per cent respectively in 2013-14—grew by 11.2 per cent and 11.9 per cent in 2014-15 (April-December).

Capital Account

Despite higher net repayments on overseas borrowings and fall in banking capital (net) with building up of foreign currency assets by banks & decline in NRI deposits (net), robust inflow of foreign direct investment (FDI) and net positive inflow of foreign portfolio investment (FPI) were sufficient to finance CAD leading to an accretion in foreign exchange reserves in H1 of 2016-17. The net FDI flows of US$ 21.3 billion recorded a growth of about 29 per cent over the corresponding period of last year. There was net inflow of portfolio investment amounting to US$ 8.2 billion in H1 of 2016- 17 as against outflow of US$ 3.5 billion in H1 of 2015-16. Banking capital recorded net outflow of US$ 6.8 billion, primarily on account of acquisition of foreign currency assets by banks, while net repayment of external commercial borrowings resulted in an outflow of US$ 4.6 billion in H1 of 2016- 17. With net capital flows remaining higher than the CAD, there was net accretion to India’s foreign exchange reserves (on BoP Basis).

Exchange Rate

Inflows on account of FIIs, particularly into the equity segment, and positive sentiments generated by a narrower CAD in H1 of 2016-17 helped the rupee to move in a narrow range. The subsequent depreciation of the rupee could be attributed largely to the strengthening of the US dollar globally following the US presidential election results and tightening of monetary policy by the Federal Reserve. Nevertheless, in 2016-17 so far, the rupee has performed better than most of other emerging market economies (EMEs). During 2016-17 (April-December), on y-o-y basis, the rupee depreciated by 3.4 per cent against US dollar as compared to the depreciation of Mexican peso (14.4 per cent), South African Rand (8.6 per cent) and Chinese renminbi (6.3 per cent).

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