PRESENTATION ON FOREIGN TRADE AND BALANCE OF PAYMENT

IMPORTANCE OF FOREIGN TRADE Foreign trade plays a significant role in the economy of each country. In the words of Robertson, “Foreign Trade is an engine of economic growth.” foreign trade helps a country to utilize its natural resources and to export its surplus production.

MEANING OF FOREIGN TRADE In the words of Robertson," foreign trade is an engine of economic growth". Foreign trade helps a country to utilize its natural resources and to export its surplus production. By proper control of foreign trade, employment, output, prices, industrialization, and economic development from abroad. Foreign Trade of India is divided into two parts:

Foreign Trade of India Before Independence After Independence

Foreign Trade of India before Independence India has been doing foreign trade since ancient times. Before 1947, the pattern of its foreign trade was like that of traditional, colonial agricultural country. It used to export mainly primary goods,viz. Foodgrains and raw materials. Its import were also limited and comprised mainly of finished products. (1) Volume of Foreign Trade: In 1834, the total value of India’s foreign trade was rs. 186 crore.In 1939, it rose to rs. 321 crore. In 1947-48, total volume of foreign trade rose to rs 792 crore. (2) Composition of Foreign Trade: Major exports from India used to be cotton textiles, jute manufactures, tea, and oilseeds. (3) Direction of Foreign Trade: Before independence 34% of the total exports went to 31% of total import came from England. (4) Balance of Foreign Trade: Before independence, India’s foreign trade used to be a surplus trade. In 1939, balance of trade was favourable to extent of rs. 17 crore and in 1946-47 it was of rs. 31 crore.

Foreign Trade of India after Independence In post-independence period, especially after 1951 when First Five Year Plan, its foreign trade underwent a good deal of transformation. 1. Volume of India’s Foreign Trade 2. Composition of Foreign Trade 3. Direction of Foreign Trade 4. Balance of Trade (I) Volume of India’s Foreign Trade In 1947-48, the value of India’s foreign trade was rs. 792 crore. This can be explained through table briefly:

Year Import Export Total 1950-51 650 600 1,250 1960-61 1,122 642 1,764 1970-71 1,634 1,535 3,169 1980-81 12,549 6,711 19,260 1990-91 43,193 32,558 75,751 2000-01 2,30,873 2,03,571 4,34,444 2009-10 13,63,736 8,45,534 22,09,270 2010-11 16,83,467 11,42,649 28,26,116 2011-12 23,45,463 14,65,959 38,11,422

(II) Composition of Foreign of Trade (A) Change in Composition of Exports After 1947, there have been significant changes in India’s exports trade. This can also explained through table: Commodity 1950-51 2011-12 Iron and Steel 20 57,552 Machinery 91 1,58,611 Transport Equipment 41 67,474 Food grains 100 5,691 Chemicals 0.57 16,595 Fertilizers 12 53,311 Paper, paperboard 10 12,305 Petroleum 87 7,43,075 Total Import (including others) 650 23,45,463

The above table reveals the following important changes in the composition of exports: (1) Decline in percentage share of agricultural products of total exports. (2) Decline in percentage share of conventional items in total exports. (3)Increase in percentage share of manufactured goods in total exports. (4) Increasing importance of exports of gems and readymade garments. (5) Change in composition of agricultural exports. (6) Exports of petroleum products. (7) Increase in exports of engineering goods, handicrafts and leather products. (8) Increase in exports of services. (B) Change in Composition of Imports (1) Decline in imports of agricultural products. (2) Petroleum products enjoy first place in imports. (3) Increase in the imports of capital goods. (4) Increase in imports of raw materials and intermediate goods. (5) Increase in imports of chemical fertilizers.

MEANING OF BALANCE OF PAYMENT Balance of payments refers to the statement of account showing all economic transaction of a country in a given period with the rest of the world. Balance of payment of a country includes imports and exports of all kind of goods, services and capital.

BALANCE OF PAYMENT COMPRISES OF TWO ACCOUNT Current Account Capital Account Current account : in the current account is included (a) the difference between the import and export of goods i.e., visible items and (b) the difference between the import and export of services like banking, shipping, insurance etc. i.e., invisible items.

2. Capital Account : It includes capital receipts and payments 2. Capital Account : It includes capital receipts and payments. Favourable or un favourable balance of payments on current account. Balance of trade includes the difference between the import and export of goods i.e., visible items only.

CAUSES OF UNFAVOURABLE BALANCE OF PAYMENTS Import of machinery : since independence, import of machines has increased on two scores : (a) during world war 2nd, machines in Indian industries overworked. Consequently, there was large-scale depreciation and wear and tear of machines. (b) industrialization of the country in the wake of five year plans also necessitated import of machines worth crores of rupees. Import of war equipments : In order to defend itself against china and Pakistan, large amount of war equipments were imported by India. These also caused disequilibrium in the balance of payment.

More demand of consumption goods : in the post war period, demand not only of foreign goods but also of Indian goods went up. Previously, large amount of oilseeds, tea etc. used to be exported out of India. Price disequilibrium : There has been wide difference in the domestic prices of the goods and the prices of goods in foreign countries. Due to inflation and backward technology domestic prices have increased more than the prices of foreign goods.

Foreign Competition : India mainly exports jute, tea and textiles, but now foreign competition in these goods is growing. Bangladesh is India’s rival in jute exports and Sri -lanka and Indonesia in the export of tea, and Korea and china in the export of cloth. This has also adversely affected our exports. Less Growth in Exports : Despite various export promotion schemes, our exports are still less than our imports. Moreover, in various year growth rate of exports is less than the growth of imports. In the year 2007-08, growth rate in exports was 28.9 per cent while growth rate of imports was 35.4 percent.

Expenditure on foreign embassies : Independent India had to establish its political relation with other countries. To that end, it had to set up its embassies in foreign countries. It was an expensive affair. It also turned balance of payments unfavourable. Other causes : (1) Poor quality of industrial production, (2) Backward technology. Besides, there are some other minor factors also accounting for adverse balance of payments, viz., poor quality, malpractices of Indian causing impediments in exports, bad effects of high cost of production on exports, etc.

MEASURES/SUGGESTIONS OF CORRECT DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS Promotion of exports : Promotion of exports is the best measure to correct an adverse balance of payments. For this, all taxes on exports goods be withdrawn, export industries should be provided raw material and transport facilities at reduced price. So that prices of these goods remain low. Increase in production : To cut down imports and encourage exports, it is essential that agricultural, industrial and mineral production be increased. Jute manufactured products, tea and coffee are of grate importance among exports from India.

Deflation : It means that prices of the goods produced in the country should be brought down. As a result of it, foreigners will get export goods at cheaper price. Thus exports will be encouraged. Because of availability of Indian goods at the lower rates, the demand of imports will also come down. Encouragement to foreign investment : Foreign industries and multinational corporations(MNCs) are encourage to invest their capital in India. Special facilities are provided to attract foreign capital. It leads to inflow of foreign exchange in the country. it also increase production of export goods and thus exports are encouraged.

Attraction to foreign tourists : Attractive picnic spots be attract foreign tourists. Government spends lot of money to develop such resorts. Besides, foreign tourists be provided with transport and other facilities. Large amount of foreign exchange can be earned from foreign tourists. Import substitution : import substitution plays an important role to correct an adverse balance of payment. Import substitution means total replacement of an imported product with domestic product of the same functional requirement mainly made from indigenous product with know-how. Its main objective is to reduce import.

Restriction on non-essential imports : Another important method of correcting balance of payments is restriction on imports. Following measures can be adopted to cut down imports. (a) Restrictions on the import of luxury goods. (b) issue of licences for the import of essential goods only. (c) fixation of quotas for the import of different goods. (d) less credit facilities for imported goods, etc. Less consumption of crude oil : As crude oil is the largest items of our imports, so government should find out alternate source of energy and develop efficient mass transport system. It will help to reduce the demand of crude oil in India.