Importance of Foreign Trade for India’s Economy

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Importance of Foreign Trade for India's Economy

Source-This post on Importance of Foreign Trade for India’s Economy has been created based on the article “A blueprint for boosting exports” published in “Business Standard” on 19 June 2024.

UPSC Syllabus-GS Paper-3– Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context– India’s foreign trade, amounting to $1.63 trillion in the fiscal year 2023-24, accounted for 41% of its Gross Domestic Product (GDP), highlights its important role in the country’s economy and employment generation. The article discusses both challenges and recommendations aimed at enhancing India’s exports. Importance of Foreign Trade for India’s Economy 

What are the issues with Indias export?

1) Decline in labor-intensive exports– Exports from labor-intensive sectors such as garments, textiles, leather products, footwear, diamonds, and gold jewelry were lower in 2023 than in 2015. Bangladesh and Vietnam have surpassed India in these sectors by adopting strategies such as using imported fabric for garment manufacturing.

2) Lack of diversification in service exports– Seventy-five percent of India’s service export earnings come from two sectors: software & IT and business services. In contrast, India holds a smaller global share (1.9%) in other service sectors such as transport, travel, maintenance and repair, insurance, financial services, and intellectual property use.

3) Overdependence on imports from China-China accounts for around 30% of India’s imports in industrial products like telecom equipment, electronics, chemicals, and pharmaceuticals. This has resulted in a large trade deficit with China, exceeding $387 billion cumulatively over six years from 2019 to 2024.

4) Impact of inverted duty structure and FTAs- Free Trade Agreements (FTAs) have created an inverted duty structure where import duties on finished goods are lower than those on raw materials.This hampers local manufacturing efforts.

Read more- India’s New Foreign Trade Policy (FTP) and its significance – Explained, pointwise

5) Quality concerns and export rejections- Indian exports, especially food and agricultural products, encounter rejections from markets such as the EU and US. This is due to issues like surpassing maximum residue limits (MRLs) for pesticides and other quality-related problems.

6) European climate regulations– ChatGPTRegulations such as the EU’s deforestation rules, carbon border adjustment measures (CBAM), foreign subsidies regulation, and German Supply Chain Due Diligence Act may harm India’s exports to the EU and create uncertainty.

What should be the way forward?

1) Reviving Labour-intensive Exports-These sectors such as garments, textiles, leather products, footwear generate more jobs per unit of investment compared to others. It is important to conduct a genuine assessment of the sector rather than relying on consultants’ reports that offer optimistic projections far into the future.

2)  Diversifying Service Exports– India needs to enhance its share in other services like transport, travel, maintenance and repair, insurance, financial services, and intellectual property to achieve a stable service export performance.

3) Reducing Dependence on China- The US, EU, and Australia are implementing measures to decrease imports from China. India must conduct a strategic review, diversify its sources of imports, and strengthen its domestic production capabilities in response.

4) Addressing Issues with Free Trade Agreements

A) The rise in FTAs has made things more complex by enabling zero-duty imports on many industrial products.This encourages imports over local purchases. The government should ensure that FTAs do not worsen the inverted duty structure.

B) The government should publish data on the performance of India’s 14 comprehensive FTAs and six preferential trade agreements to assess their effectiveness and aid ongoing trade negotiations.

5) Countering European Climate Regulations – India should develop a strategy to respond to EU regulations and possibly reduce imports from the EU in an equal measure.

6) Improving Quality Systems-To address concerns raised by Hong Kong, Singapore, and the United States regarding the quality of spices from leading Indian brands, India should align its quality standards with international norms, expand farm-to-fork blockchain tracing for major exports, issue quality control orders in consultation with industry, and establish mutual recognition agreements with key export partners.

7) Ease of Doing Business– Improving the government-business interface to focus more on businesses, setting up a user-friendly online National Trade Network for compliance, investing in modern ports, efficient logistics, and digital systems can make doing business easier and increase exports.

8) Other Export Promotion Measures-The government should promote export of high-value goods to current markets, assist small businesses in expanding globally, enhance their access to finance, encourage e-commerce exports, and reduce non-tariff barriers in critical markets.

Question for practice

What are the challenges facing India’s exports? What steps should be taken to move forward?

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