UNIT II:

1. India’s Foreign Trade Policy: The National and Global Context

A. National Context

 Strategic Framework: India’s Foreign Trade Policy (FTP) is a dynamic policy tool, updated
regularly to align with domestic priorities and global shifts. The latest FTP 2025 moves away
from fixed-term cycles to a flexible, open-ended approach, allowing continuous updates.

 Key Pillars:

o Digitization & Ease of Doing Business: Automation of trade processes, digital

documentation (Bharat Trade Net), and simplified compliance.

o Export Promotion: Focus on MSMEs, District Export Hubs, and Towns of Export Excellence.

o Sustainability & Remission: Shift from incentives to remission schemes (e.g., RoDTEP) to
comply with WTO norms.

o Sectoral Focus: Emphasis on emerging sectors like e-commerce, green products, and high-
value manufacturing.

 Policy Goals: Achieve $2 trillion in exports by 2030, boost competitiveness, and foster inclusive
growth.

B. Global Context

 Geopolitical Shifts: India’s FTP adapts to global realignments, supply chain disruptions, and
trade tensions (e.g., US-China tariffs).

 Trade Agreements: Active negotiation and renewal of FTAs/CEPAs with major partners (UK,
EU, Australia) to secure market access and reduce barriers.

 Global Compliance: Alignment with WTO rules, sustainability standards, and international best
practices.

2. Structure and Equilibrium of India’s Balance of Payments (BoP)

A. Structure of BoP

 Current Account:

o Merchandise Trade: Exports and imports of goods (e.g., textiles, oil, machinery).

o Services: IT, business services, tourism, transport.

o Transfers: Remittances from overseas Indians.

  Capital Account:

o Foreign Investment: FDI, FPI (portfolio flows).

o External Borrowings: Loans, ECBs.

o Other Capital Flows: Banking capital, NRI deposits.

 Overall BoP: Sum of current and capital accounts, plus errors and omissions; reflects change in
forex reserves.

B. Equilibrium and Recent Trends (2025)

 Current Account Deficit (CAD): Narrowed to 0.6% of GDP in FY25, lowest since FY17, due to
strong services exports ($158.5 bn surplus), higher remittances (+16.7% YoY), and reduced oil
imports.

 Merchandise Trade Deficit: Widened to $27.35 bn in July 2025, mainly due to high oil and
gold imports, and weak auto exports.

 Capital Account: Surplus from FDI/FPI inflows, though recent outflows and global uncertainty
have created volatility.

 Forex Reserves: RBI’s accumulation of reserves provides a buffer against external shocks.

3. India’s Foreign Trade in the Era of Neo-Liberal Globalization

India’s foreign trade transformed after 1991 from a protected, inward-looking regime to an open,
globally integrated system, with sharp tariff cuts, elimination of quotas, and deeper participation in
global value chains boosting exports and productivity. In the 2020s, a dynamic Foreign Trade Policy
emphasizes continuous updates, digitization, sustainability, and market-access via FTAs while
navigating geopolitical frictions, supply-chain risks, and competition from East and Southeast Asia.

Liberalization phase (post‑ 1991)

 The 1991 crisis catalyzed reforms: the rupee was devalued, licensing was dismantled, and
trade barriers were lowered to shift from import substitution to outward orientation under a
stabilization and structural adjustment program.

 Average tariffs fell from above 80 percent in 1990 to about 37 percent by 1996, while the
dispersion of tariffs narrowed, improving predictability and competitiveness for firms.

 India joined the WTO in 1995, committed to remove quantitative restrictions, reduce bound
tariffs, and align rules with multilateral disciplines over phased timelines.

 Trade openness rose as the trade‑ to‑ GDP ratio climbed from roughly 13 percent in the
1980s to nearly 19 percent by 1999/00, with export and import volumes outpacing real
output growth through the 1990s.
  Export composition and destinations diversified, with notable gains in IT services,
pharmaceuticals, textiles, engineering goods, and petroleum products as India integrated into
global value chains.

 Cumulatively, foreign trade expanded over 3,000 percent between 1991 and 2023, reflecting
sustained liberalization and global integration alongside product and market diversification.

Current era (2020s)

 Policy has moved to a flexible, open‑ ended Foreign Trade Policy that can be updated
continuously, emphasizing digitization, ease of doing business, and WTO‑ consistent remission
over incentives.

 Priorities include export facilitation for MSMEs, e‑ commerce enablement, green standards,
and targeted sectoral pushes that align with supply‑ chain relocation and friend‑ shoring
trends.

 Challenges include great‑ power trade frictions, tariff headwinds in key markets, logistics and
infrastructure bottlenecks, rupee and global currency volatility, and intense competition from
China and ASEAN suppliers.

 Opportunities lie in FTA‑ led market access (ongoing deals with major partners), PLI‑ enabled
scaling in electronics, chemicals, and autos, and leveraging services strengths to move up the
value chain in goods and digital trade.

Evidence snapshot: before vs after

Indicator Early 1990s Post‑ reform/Recent Note

Average tariff >80% ~37% by 1996 Rapid cuts improved competitiveness

Trade/GDP ratio ~13% (1980s) ~19% by 1999/00 Openness rose with reforms

Quantitative Widespread Phased out per WTO WTO membership in 1995

restrictions

Total foreign trade $22.94 bn (1991) $759.93 bn (2023) >3,000% growth since 1991

Policy stance Protectionist, license‑ raj Dynamic FTP, digitization Continuous updates and facilitation

4. Thrust Area Commodities: Trends, Problems, and Prospects

A. Key Thrust Commodities

 Engineering Goods: Major export driver; includes machinery, vehicles, and electrical equipment.
  Chemicals & Pharmaceuticals: Fastest-growing segment, with specialty chemicals and generics
leading the way.

 Textiles & Apparel: Traditional strength, but facing stiff competition from Bangladesh and
Vietnam.

 Gems & Jewellery: High export value, but vulnerable to global demand swings.

 Agri & Marine Products: Supported by APEDA/MPEDA, with strong growth in rice, spices, and
seafood.

 IT & Business Services: India is a global leader, with services exports crossing $320 bn in 2024.

B. Trends

 Growth: Exports grew by 9.3% YoY in August 2025, with the US, EU, and Middle East as top
markets.

 Diversification: New focus on green products, electronics, and e-commerce exports.

C. Problems

 Global Policy Uncertainty: US tariffs (up to 50% on textiles, gems, footwear) disrupt market
access.

 Currency Depreciation: Rupee at ₹88/USD erodes margins and raises import costs.

 Logistics & Infrastructure: High freight costs (13% of goods value), port congestion, and slow
cargo movement.

 Compliance Hurdles: Complex documentation and shifting standards in destination markets.

D. Prospects

 PLI Schemes: Production Linked Incentives for electronics, chemicals, and textiles to boost
competitiveness.

 Export Target: Ambitious goal of $2 trillion in exports by 2030.

 Market Diversification: Expanding into Africa, Latin America, and ASEAN to reduce
dependence on the US/EU.

5. Major Competitors

1. China: Dominance and Challenges

  Scale of Trade: China is India’s largest source of imports and a major competitor in global
markets. In FY 2024-25, India’s trade deficit with China reached a record $99.2 billion, with
imports at $113.5 billion and exports at just $14.25 billion.

 Key Sectors: China dominates India’s import basket in electronics, machinery, pharmaceuticals,
construction materials, renewable energy, and consumer goods. For example, over 75% of
India’s needs for lithium-ion batteries, laptops, solar cells, and antibiotics are met by Chinese
suppliers.

 Structural Dependence: China supplies critical raw materials and intermediate goods (e.g.,
active pharmaceutical ingredients, electronic components, auto parts) that are essential for
India’s manufacturing and export sectors.

 Competitive Pressure: China’s low-cost manufacturing, advanced technology, and scale

economies make it a formidable competitor in global markets for electronics, machinery,
textiles, and chemicals.

 Strategic Concerns: India’s heavy dependence on Chinese imports gives Beijing leverage over
supply chains, especially during political or economic tensions. The government is working to
reduce this dependence by promoting domestic manufacturing and diversifying import sources.

2. Bangladesh & Vietnam: Textile and Apparel Rivals

 Textile Leadership: Bangladesh and Vietnam have emerged as strong competitors in textiles and
apparel, sectors where India traditionally held a leading position.

 Cost Advantage: Bangladesh benefits from lower labor costs and duty-free access to major
markets (EU, US), while Vietnam leverages FTAs and efficient supply chains.

 Export Growth: Both countries have rapidly increased their share in global textile exports,
challenging India’s market share, especially in ready-made garments and cotton products.

 Policy Response: India is responding with Production Linked Incentive (PLI) schemes,
infrastructure upgrades, and export promotion for its textile sector.

3. ASEAN Countries: Electronics, Agri-Products, and Processed Foods

 Electronics & Machinery: ASEAN nations (e.g., Malaysia, Thailand, Indonesia) compete with
India in electronics, electrical machinery, and auto components, benefiting from regional supply
chains and FTAs.

 Agri-Products: Thailand and Vietnam are major exporters of rice, seafood, and processed foods,
often outcompeting Indian products in price and quality.

 Market Diversification: ASEAN’s integration and logistics efficiency make their exports highly
competitive in global markets.
4. Mexico, Turkey, Thailand: Emerging Competition in Engineering and Chemicals

 Auto & Engineering Goods: Mexico and Turkey have become significant players in auto parts,
vehicles, and engineering goods, challenging India’s exports in Latin America, Europe, and
Africa.

 Chemicals & Pharmaceuticals: These countries are investing in specialty chemicals and generics,
competing with India’s pharma and chemical exports.

 Processed Foods: Thailand is a major exporter of processed foods and seafood, often competing
with Indian products in Asian and global markets.

Conclusion

India faces intense competition from China, Bangladesh, Vietnam, ASEAN, and emerging players
like Mexico and Turkey across key export sectors. Addressing these challenges requires policy
reforms, domestic capacity building, and strategic market diversification to strengthen India’s
position in global trade.

6. Major Import Commodity Groups

India’s import basket reflects its energy needs, industrial ambitions, and consumer demand. In FY
2024–25, total merchandise imports reached about USD 720.24 billion, with a trade deficit of
over USD 263 billion. Here’s a detailed look at the major import commodity groups, their
significance, and recent trends:

1. Crude Oil & Petroleum Products

 Share & Value: Largest import group, accounting for about 31% of total imports (approx. USD
220.6 billion in 2025).

 Usage: Fuels transportation, power generation, and is a key input for petrochemicals and
fertilizers.

 Sources: Russia, Iraq, Saudi Arabia, UAE are top suppliers.

 Significance: India imports nearly 78% of its crude oil needs, making it highly vulnerable to
global oil price fluctuations and geopolitical risks.

2. Gold & Precious Metals

 Share & Value: About 12% of total imports (approx. USD 83.3 billion).

 Usage: High demand for jewellery (especially during festivals and weddings), investment, and as
a reserve asset.

 Sources: Switzerland, UAE, South Africa.

  Trends: Gold imports often surge during festive seasons, impacting the trade deficit.

3. Electronics & Electrical Machinery

 Share & Value: Around 12% of imports (approx. USD 84.9 billion for electrical machinery; USD
29.1 billion for electronic goods).

 Key Items: Integrated circuits, smartphones, computers, solar panels, telecom equipment.

 Sources: China (dominant), Vietnam, South Korea, US, Japan.

 Significance: Reflects India’s growing digital economy and consumer market, but also highlights
dependence on foreign technology and components.

4. Machinery (Including Computers & Transport Equipment)

 Share & Value: About 9% of imports (approx. USD 61.6 billion).

 Key Items: Industrial machinery, agricultural equipment, IT hardware, auto parts, aircraft, and
railway equipment.

 Sources: Germany, US, Japan, China, Singapore.

 Role: Supports India’s manufacturing, infrastructure, and modernization efforts.

5. Chemicals & Fertilizers

 Share & Value: Organic chemicals (approx. USD 26 billion), fertilizers (approx. USD 10.5
billion).

 Usage: Essential for pharmaceuticals, agriculture, textiles, and industry.

 Sources: China, US, Saudi Arabia, Singapore.

 Trends: Fertilizer imports are crucial for food security, especially when domestic production is
insufficient.

6. Coal, Coke & Natural Gas

 Share & Value: Coal and related products (approx. USD 38.9 billion).

 Usage: Power generation, steel production, and heavy industry.

 Sources: Russia, Indonesia, Australia, South Africa.

 Significance: India is the world’s second-largest coal importer, despite having large reserves,
due to quality and supply gaps.

7. Edible Oils & Pulses

 Share & Value: Vegetable oils (approx. USD 17 billion).

  Key Items: Palm oil, soybean oil, sunflower oil, and pulses.

 Sources: Indonesia, Malaysia, Ukraine, Canada.

 Role: Fills the gap between domestic production and high consumption, especially for cooking
oils and protein sources.

8. Gems, Pearls & Semi-Precious Stones

 Share & Value: About USD 23.8 billion in 2024–25.

 Usage: Raw materials for India’s jewellery export industry.

 Sources: South Africa, UAE, Belgium.

9. Plastics & Plastic Articles

 Share & Value: Approx. USD 21.9 billion.

 Usage: Packaging, construction, consumer goods, and manufacturing.

 Sources: China, Germany, US.

10. Iron & Steel

 Share & Value: Approx. USD 17.7 billion.

 Usage: Infrastructure, construction, and automotive sectors.

 Sources: South Korea, China, Japan.

7. Trade Control in India

A. Legal and Policy Framework

 Foreign Trade (Development & Regulation) Act, 1992: Empowers the government to regulate
imports/exports.

 Customs Act, 1962: Governs import/export procedures and duties.

 DGFT: Directorate General of Foreign Trade implements FTP, issues licenses, and monitors
compliance.

B. Control Measures

 Tariffs & Duties: Used to protect domestic industries and generate revenue.

 Import Licensing & Quotas: Applied to sensitive goods (e.g., defense, agriculture).
  Anti-Dumping & Safeguard Duties: Protect against unfair trade practices.

 Quality Standards & SCOMET Policy: Regulate export of sensitive and dual-use items.

 Export Promotion Schemes: Advance Authorisation, EPCG, RoDTEP, and SEZs to incentivize
exports.

C. Recent Trends

 Digitization: Automation of licensing and documentation (Bharat Trade Net).

 Compliance with WTO: Phasing out of quantitative restrictions, alignment with global norms.

 Focus on Sustainability: Green standards and responsible sourcing in trade controls.