Golden Bird Reimagined:: India's Modern Trade Triumphs and Trials
BY VANSHITA KALRA/ SEPTEMBER 21, 2024
DESIGNED BY KHADIJA RIZVI
India’s investments in infrastructure and innovation have enhanced its integration into global markets. Once import-focused to highly protected and then liberalised, it is currently on the path to prosperity.
ndia, once known in the world as The Golden Bird, was the world's largest economy between 1 AD and 1000 AD. Contrary to the current situation where the country shares a combined 2% of the world's trade, our contribution to the Global Economy in 1600 AD was somewhere near 25.1% (History of Indian economy, n.d.) – equal to all of Europe’s present share.
I
With the arrival of the East India Company, India's economic trajectory shifted drastically. Colonial rule brought about a decline in trade and economic autonomy that significantly altered India's pre-colonial economic state. The East India company enjoyed a trade monopoly and would import high quality raw material at inexpensive rates. Finished products were then sold at unreasonably inflated prices.
After gaining independence in 1947, India began its economic recovery, albeit under the lingering effects of colonialism. Since India’s economy was primarily agrarian and highly dependent on imports of consumer goods such as cotton, silk, and light machinery, the pressure on policy makers of the newly independent India was enormous. The colonial trade policies that had benefited British economic domination had to be quickly changed, and policies that supported industrial expansion and self-sufficiency had to take their place. Excessive tariffs and strict regulations aimed at safeguarding domestic industry thus defined this era.
The nation first embraced the import substitution industrialisation (ISI) policy, which sought to increase home production and lessen reliance on imports. India had a small trade deficit in 1948 despite its merchandise exports being worth slightly over USD 1 billion (Khurana, 2024). At that time, food grains and basic consumer goods, along with intermediate goods like mineral oils, dominated imports, while major exports included jute, cotton, oil seeds, and tea. Overall, India's industrial and trade policies were greatly influenced by the economic theories of that time, which frequently supported government intervention. To name a few, the princples of Keynesian economics were embraced by India as they focused on public sector investment in order to ensure basic welfare for the people. Through the implementation of Five-year Plans, theories of developmental economics were utilised to provide social, fiscal and economic stability.
India's integration into the world economy through enrollment in exchange understandings and organisations was the primary objective of globalisation activities.
However, these protectionist measures were accompanied with several limitations that adversely affected the Indian economy. The infamous balance of payments crises in 1991 and India’s alarming inadequacy of foreign reserves led to the turning point in the trade scenario. As a response to this economic emergency, LPG (Liberalisation, Privatisation, and Globalisation) was introduced in 1991. Initially, India's integration into international trade was hampered by the ISI programme. Thus the LPG programme sought to bring in foreign investment and technology while
Pictured: PM PV Narasimna Rao with Finance Minister Manmohan Singh and others by Anonymous via India Before 91 (2023, March 13).
also lowering trade barriers and expanding the Indian economy. As a result, Indian businesses were able to enter global markets with better competitiveness and increased productivity. The objective of privatising state-owned companies (SOEs) was to reduce government obstructions in non-strategic zones and upgrade administration methods. India's integration into the world economy through enrollment in exchange understandings and organisations was the primary objective of globalisation activities. Consequently, LPG reforms accelerated economic growth and made India a dynamic player in international trade.
But these reforms came with challenges. They had a unique impact on each economic sector. Before the reform, the agricultural sector grew at a rate of 3.7% a year; from 1991 to 2012, this percentage fell to 2.9% (Ahulwalia, 2016). During the period of economic reform, the farm sector nearly stagnated, indicating that the growth process placed more of an emphasis on the corporate, industry, finance, infrastructure, and communications sectors than it did on the agriculture sector. The drop in agricultural gross capital formation has been a clear consequence. Particularly, the share of public sector investment in the nation's total gross capital formation has nearly stagnated, falling from 6.42 % in 1993–1994 to 7.79 % (1991: Economic Reforms, 2022). This drop in agricultural gross formation led to slower growth, and decreased capital formation meant lower investments. This further implied a reduction in farming and non farming agricultural employment, as well as decreased productivity owing to the lack of technology.
Consequently, India's service industry saw a dramatic transformation as a result of the LPG reforms, which promoted greater competition, attracted foreign investment, and spurred notable growth. These changes increased access to technical development and improved infrastructure. This further enhanced customer experiences and increased the availability of premium services which include hospitality, communications, entertainment, health, education and transport. Deregulation and privatisation allowed the arrival of private and foreign businesses encouraging efficiency and innovation. As a result, the service sector had faster job growth, improved service delivery, and a wider range of options for customers, all of which aided in the nation's overall economic progress.
Pictured: Graph by Khurana, M. (2024). How is India’s trading landscape shaping for the future via Economics observatory.
Over the past three decades following the reforms in 1991, India’s trade has transformed a lot, most notably in light of global events like the Covid-19 pandemic. Although the journey has not been without challenges and setbacks, India has utilised its potential by signing new trade agreements frequently, revising older ones, and navigating its way through deficits. As of 2024, India has 13 Free Trade Agreements (FTA) signed with its trading partners including, Sri Lanka, Nepal, Bhutan, Thailand, ASEAN, South Korea, Japan, Malaysia, Mauritius, SAFTA, Singapore, UAE, and Australia. These FTAs help make India’s exports competitive in the global market by removing tariff and non tariff barriers. They also enhance purchasing power of the consumers as imported goods would be provided at competitive prices thereby broadening the variety of goods and services.
Beginning in 1992, the economic ties between India and ASEAN have grown stronger over time. This has been a result of ASEAN's exports of services that included healthcare, education and tourism and India's expansion in manufacturing of textiles, electronics, pharmaceuticals, and automobiles. Both areas have comparable degrees of economic development, providing room for a variety of commercial activities and trade. Given that India currently has a trade deficit with ASEAN, it is trying to renegotiate an FTA that would be more equitable and mutually beneficial. An ideal agreement in this scenario would grant India larger access to the ASEAN markets, opening doors for India to rebalance the trade by exploring further export opportunities. It would also include revists to non-tariff barriers.
Furthermore, India has an exceptionally strong relationship with the members of GCC (Gulf Cooperation Council) namely, Saudi Arabia, Bahrain, Oman, Kuwait, Qatar and UAE. As India depends on them for energy exports and they rely on India for food security, the relationship is equitable with mutual scope for growth. As India continues to contribute to the GCC’s development plans primarily in the field of energy, healthcare technology and infrastructure, the trust in this relation lays a strong foundation for future trade opportunities.
Countries like UAE and Saudi Arabia from the Council are also India’s top third and fourth trading partners. Owing to the economic enthusiasm, discussions for further developments in agreements, India and UAE signed a Comprehensive Economic Partnership Agreement (CEPA). Under the agreement, UAE is set to eliminate duties on 80 % of its tariff lines which account for 90% of India’s exports to the UAE by value (Das, n.d.). Key domestic sectors that are set to benefit include, gems and jewellery, textiles, leather, footwear, sports goods, engineering goods, automobiles, and pharmaceuticals. Although the CEPA may result in more rivalry for local industries, which could have an impact on job security in some areas, it may also contribute to higher purchasing power and employment opportunities. In general, the CEPA seeks to establish a more advantageous and economical market environment that supports economic expansion and benefits consumers.
Pictured: List of Major Trading Partners of India 2024 by Anonymous via Eximpedia (2024, February).
The cases of ASEAN and the UAE are not the only examples of agreements made by India. The country has also entered into six Preferential Trade Agreements (PTAs) to boost trade and economic cooperation with various regions. The Asia-Pacific Trade Agreement (APTA) is one such example, which aims to increase trade among its member countries including India, China, and South Korea through tariff concessions.
Recently, India has been gradually redirecting its trade focus from the East to the West, indicating a strategic shift to diversify trade partnerships and enhance economic development.
Recently, India has been gradually redirecting its trade focus from the East to the West, indicating a strategic shift to diversify trade partnerships and enhance economic development. During the fiscal year 2021-22, the USA was India's primary trading ally. In 2023-24 the USA also established itself as India’s second biggest trade partner. America is one of the few countries with which India has a trade surplus, amounting to USD 36.74 billion in FY 23 (India in trade deficit with 9 of top 10 trading partners in 2023-24: Data, 2024).
Furthermore, exports to the European Union also experienced a significant growth of 2%, year-on-year at USD 98 billion (Nandi, 2024). Discussions with the European Union regarding a Free Trade Agreement (FTA) have been rekindled, potentially leading to an increase in trade volumes. Surpluses like these boost economic growth and as production increases owing to rise in exports, employment opportunities bolster. It can also lead to decreased prices of domestic goods making them much more affordable for domestic consumers.
Consequently, in light of geopolitical tensions, India has decreased its reliance on China, with imports from China constituting 14% of India's total imports in 2020, down from 16% in 2019 (Patranobis, 2020). India has been expanding the range of trading partners it has, especially in vital industries like telecommunications, electronics, and medicines. India's reliance on China for trade has steadily decreased in recent years as a result of geopolitical factors, economic initiatives, and governmental regulations. "Atmanirbhar Bharat" (self-reliant India) and other such initiatives have pushed enterprises to look for alternatives, while tariffs and import restrictions on Chinese goods have stimulated domestic manufacture.
China’s transformative trade practices have stood the test of time, as it remains unaffected by global shifts in trends mainly because of its high domestic consumer demand. The country has been exploring multilateral trade operations, so as to expand its network and explore the global market. This practice by China has fostered a sense of caution in countries that are highly affected by the export demand of the West which has been significantly falling. Thus, less reliance on China is critical for India because it improves national security against geopolitical risks, fosters local industries, and increases economic resilience — all of which lessen India's susceptibility to geopolitical conflicts. Thus, less reliance on China is critical for India because it improves national security against geopolitical risks, fosters local industries, and increases economic resilience — all of which lessen India's susceptibility to geopolitical conflicts.
Although India is undoubtedly poised to become one of the most significant players in global trade, it's important to recognise the challenges as well. From uncertainty in the global market due to the aftermath of the pandemic to underdeveloped infrastructure, the reasons are endless. Another challenge is global shifts in trends: countries that promoted and practised globalisation are now taking protectionist measures for self sufficiency so as to reduce deficit. Countries like Brazil and Mexico have adopted such measures. Despite the revision of agreements and signing of new ones, deficits in industries like IT and not being part of some major FTAs is a concerning aspect for Indian trade.
By leveraging its demographic dividend and embracing digital transformation, India is poised to enhance its global trade footprint, contributing significantly to the world economy.
While India navigates some important trade decisions and tries to overcome challenges, it definitely has achieved remarkable growth. India's trade to GDP ratio has increased from 25.99% in 2001-02 to 49.23% in 2022-23 (India’s share of Global GDP, n.d.). In 2023, the growth has been prominent, even if slow. India contributed 16% to global growth and had the second-highest growth rate among G20 countries (Kundu P, 2023). The potential is endless since we are home to some of the most innovative and creative minds in terms of Human Resource, vast unused coastlines that connect us to various countries, and some of the best quality of agricultural and non-agricultural crops that are highly in demand in the foreign markets. This potential is a gift that can keep giving if used correctly. By leveraging its demographic dividend and embracing digital transformation, India is poised to enhance its global trade footprint, contributing significantly to the world economy.
Pictured: 'Making India' by Khadija Rizvi.
Keywords
Global markets integration, LPG (Liberalisation, Privatisation, Globalisation), Free Trade Agreement (FTA), ASEAN, Gulf Cooperation Council (GCC), Comprehensive Economic Partnership Agreement (CEPA), Atmanirbhar Bharat, Geopolitical Tension, Global Trade, India China Relations, Trade to GDP Ratio, Digital Transformation, Export Competitiveness
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