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External Trade and Investments in India

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External Trade and Investments in India

India's economy largely depends on its huge internal market and the external trade contributes only 20% of the country's GDP. India's annual imports were US$236 and exports stood at US$155.5 billion in March 2008.

India accounted for 1.45% of global merchandise trade and 2.8% of global commercial services export. India was isolated from the world markets, to safeguard its economy and to relay on itself in 1991.

Foreign Direct Investment (FDI) involved restrictions on technology transfer, export obligations and prior government approvals were needed for 60% of new foreign investments in industries. As per rules foreign investments are restricted to an average only around US$200 million annually between 1985 and 1991.

The capital flows in the form of foreign aid, commercial borrowing and deposits of non-resident Indians. After 15 years of independence India's exports stabilized only because of predominance of tea, jute and cotton manufactures. Machinery, equipment and raw materials, were imported from other countries due to prurient industrialization.

India's major trading partners are China, the US, the UAE, the UK, Japan and the EU. The exports increased to $12.31 billion during April 2007 with the growth of 16% and import were $17.68 billion with an increase of 18.06% from the previous year.

In 2006-07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewelery, textiles and garments, agricultural products, iron ore and other minerals whereas crude oil and related products, machinery, electronic goods, gold and silver were imported.

India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and WTO. India has opposed the inclusion of labour and environment issues and other non-tariff barriers into the WTO policies.

Balance of Payments

Since India got independence, her balance of payments on its current account has decreased. Since liberalisation in the 1990s, India's exports have been consistently rising, covering 80.3% of its imports in 2002–03, an increase over 66.2% in 1990–91. Huge current account deficit might be due to growing oil import bill. In 2007-08, India imported 120.1 million tonnes of crude oil at a price tag of $61.72 billion.

Since 1996–97 India’s overall balance of payments has been positive due to increase in foreign direct investment and deposits from non-resident Indians. As a result, India's foreign currency reserves stood at $285 billion in 2008.

Due to recession in late 2000 both the exports and imports of India declined by 29.2% and 39.2% respectively in June 2009. The sharp decline was because United States and members of the European Union which account for more than 60% of Indian exports has been hit hard by this recession.

Decline in interest rates and reduction in borrowings decreased India's debt service ratio to 4.5% in 2007. External Commercial Borrowings (ECBs) by Government of India and regulated by Ministry of Finance provides an additional source of funds to Indian corporates.


Foreign Direct Investment in India


Share of top five investing countries in FDI inflows. (2000-2011)

Rank

Country

Inflows
(Indian Rupees/Million USD)

Inflows (%)

1

Mauritius

2,427,607.2 (54,227.1)

42%

2

United States

425,422.4 (9,448.6)

7 %

3

United Kingdom

294,326.8 (6,639.0)

5 %

4

Netherlands

256,268.9 (5,700.4)

4 %

5

Singapore

528,762.9 (11,895.2)

9 %



India is the fourth-largest economy in the world in PPP terms. India holds strengths in information technology, auto components, chemicals, apparels, pharmaceuticals, and jewelery and are the fields that attract foreign direct investments.

 Despite a flow of foreign investments, rigid FDI policies offered hindrances. India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise.

Recent FDI policy which came in 2005 allows up to a 100% FDI stake in ventures. Industrial policy reforms have reduced the requirement of industrial licensing, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment. In March 2005, the government rectified the rules and allowed 100 per cent FDI in the construction business.

A number of changes were approved on the FDI policy to remove the caps in civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, credit-information services and mining.

According to the government's Secretariat for Industrial Assistance FDI inflows into India reached $19.5 billion in fiscal year 2006-07 (April-March) which is increased to $24 billion in 2007-08. The economic growth and potential to be an economic superpower will largely depend on how the government can create incentives for FDI flow across a large number of sectors in India.
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