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Trade is exchange of goods for money or other goods. International Trade is a transaction between residents of different countries or flow of goods, services & capital across international borders. ` Global trade existed from time immemorial & can be traced to the Indus valley civilization around 3000 B.C. The first ship of the East India Company arrived at the port of Surat in 1608, primarily to carry out trade with India. America was discovered accidentally when Vasco da Gama was trying to reach India for trade
RISK SPREAD Reduces dependencies on one market. ACCESS TO IMPORTED INPUTS - Lowers cost of manufacture. UNIQNESS OF PRODUCT/SERVICES : IT/ BPO LIFE CYCLES : Extends life cycle. SPREADING R & D COSTS : Ultimately reduces value of the product
Even if a company does not desire to participate directly in international business, it can not escape the ever increasing influences of firms exporting, importing & manufacturing abroad. Neither can any firm ignore the effects of various M&As & consolidations of business, growth of regional trade areas, rapid growth of world markets & the increasing number of competitors for global business. Four trends stand out as the most dynamic, affecting global business today & are likely to impact the growth of international business in the coming days: Rapid Growth of WTO & regional free trade areas Acceptance of free market system among developing countries in Latin America, Asia & Eastern Europe. Impact of internet & global media on the dissolution of national borders Mandate to properly manage the global resources & global environment for generations to come.
Every business has to compete in an increasingly interdependent global economic & physical environment. As competition for world markets intensify, the number of companies operating solely on domestic markets will decrease and all businesses will subsequently become international in some form or other.
- Creation of many barriers resulting in deceleration of pace of globalization. Trade virtually at standstill during peak wartime - Post World War II (after 1945) - Drive to create integration & cooperation between countries. Despite this it took a very long time to reach trade levels prior to 1st world war. - Several developing countries which gained independence, followed a self reliance & import substitution strategy. - Political blocks were created and some of them shielded themselves from the rest of the world - .
49.8
54.2
74.6
74.1
Current scenario indicates rapid pace in growth in world trade as a result of market integration and impact of information technology. World Bank studies have revealed that counties that trade, grow faster. The growth in world trade has outpaced the growth in world output every year since 2002. There have been strong import demands from developing countries of Asia, the transition countries and USA. Import & Export growth of 10-12% was observed in Asia & the transition countries whereas the import growth in us was around 5-7% High income countries account for more than 75% of world trade and are major markets for low and middle income countries. Countries of emerging Asia ( China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan & Thailand) have driven world trade of late: Had GDP growth averaging 7% between 1970-2002 as compared to GDP growth of 3% for OECD counties. Share in world GDP has increased from 7 % in 1970 to 25 % in 2002. Accounted for 44% of GDP growth & 24% of export growth in 2002 Are integrating economically and exports between these counties have grown steadily from 20% in 1970 to 40% in 2002.
There has been a shift in composition of world trade and the shift is from resource base to value added products and the share of manufactured goods have risen significantly. This is due to developments in technology, lower transportation costs & improved communications and business practices. Institutional reforms have also played a key role. Consumer desires have been created by increases in per capita income, developments in information & communications technologies
SHARE%
9.2 8.6 8 5.4 4.1 3.8 3.7 3.4 3.2
RANK
1 2 3 4 5 6 7 8 9
IMPORTS
909 1919 792 580 534 416 619 437 358
SHARE%
7.3 15.5 6.4 4.7 4.3 3.4 5 3.5 2.9
RANK
2 1 3 5 6 8 4 7 9
10 12 14 19 28
10 11 15 23 17
Indias imports have also grown from $1.7b in 1951, to $ 185.6b in 06-07 and India was the 17th largest importer in 2006. Indias net service exports have also grown rapidly and India was the 10th largest service exporter in 2006. Over the years, there has been a major change in the product profile of goods exported by India. Share of agricultural products have declined from 44.2% in 1960-61 to 11.8% in 03-04. Share of manufactured goods have risen from 45.3% in 6061 to 76.2% in 2003-04. Amongst manufactured products, most significant growth have been shown by gems & jewellery (0.1% to 2.4%) and readymade garments (0.1% to 9.8%) during the above period. Similarly, there has also been a significant shift in market profile and the exports are shifting southwards. the main markets today are Asia & Oceania which account for around 47% of our merchandise exports followed by West Europe(24%) & North America(18%). As per our governmental policy, future trade flows are to be geared towards the developing nations. Indias main imports during 06-07 have been petroleum & petroleum products(30.7%) followed by capital goods (25.4%). Electronic goods (8.6%) & gold (7.8%) are the two principal non-oil commodities imported by us. China is the major source of imports to India and value of imports from China increased from $2.8b in 02-03 to $17.4 b in 06-07. This
represented 9.4% of Indias total imports that year. Other major sources are USA $11.7b (6.3%). Other major import sources are Switzerland, Germany, Australia etc.
expected that sharp economic decline in key developed countries will be partly offset continuing strong growth in emerging countries.
TOTAL(INCLDG OTHERS)
83.54
126.33
2000-01 PETROLEUM CRUDE ELECTRONIC GOODS GOLD MACHINERY EXCEPT ELECTRICAL &ELECTRON TRANSPORT EQUPT METAL ORES & SCRAP PEARLS & PREC STONES IRON & STEEL 0RGANIC CHEMICALS COAL, COKE & BRIQUETT TOTAL( INCLDG OTHERS) 49.9 1.4 4.8 15.7 3.5 4.1 2.7
3.2
4.3
8.8 3.9
Composition of Trade
Historically, the main exports from India were primary goods like jute, tea, cotton, hides & skins, manganese ore, mica etc whereas manufactured goods constituted the bulk of imports. Since trade liberalization in 1991, there has been considerable increase in exports both in traditional & non-traditional items. Traditional export items: Coffee, Tea, Tobacco, Cashew kernel, Cotton yarn, Spices , Jute etc. Non-traditional export items : Iron ore, Sugar, Molasses, Fish & Fish preparations, Garments, Leather, Gems & Jewellery, Chemicals & allied products, Machinery etc. Indias exports are generally classified into three categories : primary products, manufactured goods & petroleum crude & others. Primary products include agricultural & allied products & ores & minerals. share of agricultural & allied products has declined considerably from about 19.4% in 1991 to about 9.9% in 2006-07. however, share of ores & minerals marginally increased during the period from 4.6% to 5.6%. Iron ore is the major constituent in this category, contributing about 70%. The total proportion of manufactured goods in the total exports of India has remained steady at around 70%.
Engineering goods, gems & jewelry, chemical products, readymade garments, cotton yarn etc & leather & leather products are the main constituents of manufactured goods During 2006-07, engineering goods was the largest constituent in this category, with exports valued at $29.08 b (23%) , followed by textile fabrics & manufactures at $17b (13.5%) & chemicals & allied products $16.73b (13.2%). gems & jewelry also occupies a prominent place with exports of $15.59b(12.3%). Interestingly, gems & jewelry & ready made garments exports constituted a meager 0.1% each of our total exports in 1960-61. Petroleum & crude items category had the mosOther items of exports constituted hardly 3% of value of total exports in 1990-91. this proportion had increased to almost 13% by the year 2005-06. t phenomenal increase in the last few years and exports in this category increased from $ 6.99 b (8.4%) in 04-05 to $ 18.55 b(14.7%) in 06-07 Composition of Trade (3) CURRENT TRENDS Indias Merchandise Trade grew at 22.8% during 2007-08( Apr-Feb). This compares with 23.2% growth during corresponding period last year. Growth in Imports at 30.1% was higher than 25.2% recorded a year ago.
Non oil imports which recorded a substantial increase of 31.8% (22.6% a year ago) contributed about 72% of overall import growth. Oil imports during April- Feb 2008 showed a deceleration of growth ( 26.4% against 31.2% in April- Feb 2007). Merchandise Trade deficit during April-Feb 2008 aggregated $ 72.5 B , an increase of $ 23.1 B over a year ago. Commodity wise details show that capital goods, gold & silver were the main contributors of growth in non-oil imports.Capital goods increased by 31.6% and gold & silver increased by 34.4% during April-Dec 2006. Commodity wise data for exports for Apr- Dec 2007, show that all major commodity groups, barring agriculture & allied products, ores & minerals & gems & jewellery group showed deceleration. Growth of exports in manufactured goods also moderated during this period.
Direction of Trade
Pre-independence period Colonial relationship decided Indias Trade relationships Post- Independence period India strengthened its political & diplomatic relationship with other countries. It reduced the vulnerability of the economy to political pressures.
Indias Trading Partners have been generally categorized to Organization of Economic Cooperation & Development : comprises of European Union, USA, Canada, Japan & Australia. These countries account for a major portion of Indias Exports and Imports. However, their share has reduced over the years. During 2006-07, OECD countries accounted for 41.2% of our exports as compared to 56.5% in 1990-91.The corresponding figure for imports are 36.5% (2006-07) as compared to 57.2% (1990-91). USA & Germany are the largest partners of trade with us amongst these counties. Organization of Petroleum Exporting Counties : Comprises of countries like, UAE, Saudi Arabia, Iran, Kuwait etc. Trade with these countries have shown a positive growth over the years. While our imports from these countries have grown from 16.3% in 1990-91 to 29.4% in 2006-07, exports have nearly increased 3 times from5.6% to 16.4%
Direction of Trade (3
East-Europe: East European countries , specially Russia were important trading partners of India. However, due to disintegration of USSR & unstable political climate in the region, there has been a sharp fall in trade with these countries. Exports to these countries fell from 17.9% in 1990-91 to mere 2.0% in
2006-07. Similarly, imports from East Europe fell from 7.8% to 2.4% during the corresponding period. Developing Nations: Developing nations of Asia , Africa & Latin America fall in this category. Countries of Asia are by far the most important of these. These countries accounted for 40.1% of our exports & 31.3% of our imports during 06-07. CURRENT TRENDS USA continued to be the single largest market for our exports during 2007-08 although its share declined from 15.3% in Apr-Dec 2006 to 13.4% in Apr-Dec 2007. USA was followed by UAE (10.1%), China (6.0%), Singapore (4.5%) & UK (4.3%)
Balance Of Trade
The difference between the value of exports(in FOB terms) and the value of imports in (CIF Terms) is termed as the Balance of Trade. India consistently had a negative Balance of Trade or a Trade Deficit from the early 50s to the present times, except for the year 197273, when we had a marginal Trade Surplus of $134 M & the year 1976-77 when we had a surplus of $ 77 M. While Indias trade Deficit was a mere $ 4 M in the year 1950-51, it rose to $ 59.3 B in the year 2006-07 and further to $ 80.4 B during April-March 2008. The widening Trade deficit shows that Indias Imports, both oil and non-oil, have risen more steeply than the export figures. The various factors which have hindered our export growth are: High Costs: due to higher prices of inputs, time and cost overruns, lower levels of productivity, higher interest rates and so on. Inadequate quality perceptions, unreliability in contractual fulfillment. Inability to establish strong brand image & lack of commitment to exports. Infrastructure bottlenecks, procedural complexities and institutional rigidities.
Inadequacy of Trade information systems A countrys Balance of Payments is defined as a summary of all economic transactions that have taken place between the countrys residents and the residents of other countries during a specific time period. The Balance of Payments, generally: - Are computed on a monthly, quarterly or yearly basis. - Includes both visible & invisible transactions. - Reports the countries international performance in trading with other nations and the volume of Capital flowing in & out of the country. - Uses the system of Double-entry bookkeeping - Every debit or credit in the account is also represented as a credit or debit somewhere else - Currency inflows are recorded as credits (plus sign) & currency oThe accounts used for computing the Balance of Payments include the following three components:
Current Account: It includes import and export of goods and services and unilateral transfer of goods & services. The current accounts balance thus includes trade balance as well as invisible accounts balance. Invisible Accounts includes the following heads Services : This includes travel, transportation,insurance, government not included elsewhere, software and other services. Software services is by far the largest component in this category, followed by travel. The contribution of other items in this category are marginal (The term non-factor services is also used to denote these). Transfers: Mainly denotes the monies sent by Non Resident Indians and others to India. The amounts received under this head have contributed significantly to a comfortable foreign exchange situation at present. India received almost $ 28B as transfers during Apr-Dec 2007. Investment income & Compensation of employees are the other two heads included in the computation of Current Accounts Balance. The investment income is a large contributor to the balanceutflows are represented as debits( minus sign) Capital Account: It includes transactions leading to changes in financial assets & liabilities of the country. The following transactions are known as Capital Account transactions;
Foreign Direct Investment: This plays a very important role in the economic growth of the country. During Apr-Feb 2008, total inflows under FDI category was $ 25.5 B . These went mainly into manufacturing industries(20.1%), followed by financial services ( 18.7%) and the construction sector (14.7%). Source wise, Mauritius, remained the main source of FDI to India during Apr- Feb 08, followed by Singapore & USA. During 2006-07, India received FDI of $ 8.5B. Interestingly, India has also made significant FDI outflows during recent years. FDI abroad amounted to $ 9.53 B during Apr- Dec 2007. Portfolio Investment: These are normally made by Foreign Institutional Investors (FII). Net inflows by FIIs aggregated to $ 20.3 B during the financial year 2007-08 as compared to the figure of $7.1B in 2006-07. The number of FIIs registered with the SEBI increased to 1319 by March 31, 2008. External Commercial Borrowings (ECB): these are mainly medium to long term borrowing and during the period AprDec 2007-08, the net inflows under ECBs amounted to $ 16.3 B as compared to the figure of $ !6.2 B in 2006-07 .
FDI Equity inflows in various sectors between April 2004 to March 2008 (In $ Bn)
Short Term Trade Credit : Net short term trade credit amounted to $10.8 B ( inclusive of suppliers credit up to 180 days, amounting to $4.2 B) in Apr- Dec 2007. External assistance : India received external assistance valued at $1.8 B in 2006-07. The net External assistance received during Apr- Dec 2007 was $1.25 B. NRI Deposits: The NRI deposits during the period 2006-07 was $4.3 B. This amount was very low during the current year. We can observe that there have been significant increase in capital flows in 07-08 as shown below: FDI to India: increased by 29.8 % in Apr-Feb 07-08 over same period 06-07. FII (Net) increased by 6.3 times in 07-08 over 06-07. ` ECB (Net) increased by 66% in Apr- Dec 07 over that of Apr- Dec 06 Short term Credit : increased by 91% in Apr- Dec 07. Reserve Account : It includes only the reserve assets of the country. These are the assets that the monetary authority of the country uses to settle the deficits and surpluses that arise in the other two categories taken together.
Indias foreign exchange reserves were $ 309.7 B in end march 2008, showing an increase of $110.5 B over end March 2007.
FDI is a long term commitment of funds by companies of one country to another country. FDI involves transfer not only of money but also of technology. FDIs are generally made by MNCs and their profitability is vulnerable to change since cash flows depend on the generation of revenues, the exchange rate and the cost of capital. FDI decisions are guided by not only financial returns analysis but by a host of other factors and a comprehensive country risk analysis has to be made before giving shape to a FDI proposal. Such analyses then must also be carried out on a regular basis, for updating strategy, capital budgeting decisions, evaluation of cost of capital etc. in respect of the investments made. Top sectors receiving FDI inflows during Aug 1991 to Apr 2007 to India are electrical equipment ($8.72B), services ( 8.37B), tele-communications ($3.9B), transportation ($3.74B) & power & oil refinery ($2.87B).
Disequilibrium in BoP
Balance of payment position is considered favourable, when receipts from foreigners, exceed payments made to them and unfavourable when payments exceed receipts.
Disequilibrium is caused by random variations in trade, fluctuations in production of primary goods resulting in unusual trade in such commodities and are generally temporary in nature. Disequilibrium in BoP can also occur as a result of : Technological improvements affecting quality & price of some products, in certain parts of the world, resulting in altering pattern of trade. State of economic development of a nation Drastic shifts in consumer tastes, as a result of improvements in communications technology , information systems etc. Changes in income level of the people of a nation, as a result of high growth rates, leading to a different level of consumption pattern & higher imports. Inflation, thereby increasing the cost of output of a country also results in reduction in exports.
$0.173B in 1960-61, $ -0.049B in 1970-71, $5.065B in 1980-81 & $ -0.242B in 1990-91. This led to significant current account deficits and in the late 1980s Indias BoP was vulnerable to external shocks. Our foreign exchange reserves declined from $5.97 B in 1985-86 to $3.37B in 1989-90 & the current account deficit which traditionally used to be less than 2% of GDP had reached 2.93% of GDP in 1988-89. Because of increased short term borrowings, interest burden nearly doubled from $2.128B in 1988-89 to $4.12B in 1990-91. Our reserves accounted for 1.6 months of imports in the year 1989-90. The Gulf war in 1990 nearly doubled the crude oil price & our reserves got depleted to $ 2.24B by the end of 1990-91. This covered less than one months import bill. Substantial outflows of deposits by NRIs added to the crisis. Reserves declined further to $ 0.9B on 16th January, 1991 & current account deficit as a percent of GDP shot upto 3.24% The Government of Indias initial response was to cut on imports and impose further control on consumption of petroleum products. Import of most of the products, barring the extremely essential ones, was made extremely difficult to conserve foreign exchange. New Government was formed in June 1991. Rupee was devalued but this new Government subsequently went on to initiate a host
of reforms in the economy & some of the measures initiated were: The Rupee was partially freed in February, 1992 Import restrictions on capital goods, raw materials & components were virtually eliminated. Tariff and non-tariff barriers were reduced to partially open up our markets. Government liberalized the policy framework for inflow of capital by Allowing Indian companies to raise capital from international capital markets through Global Depository Receipts (GDRs) Welcoming Foreign Institutional Investments This led to substantial inflow of capital and capital account surplus exceeded current account deficits by wide margins.
90-91 27.72
91-92 21.21
92-93 24.32
93-94 26.74
94-95 35.90
2. Exports (fob)
16.96
18.48
18.14
18.87
22.68
26.85
(2-
-7.46
-9.44
-3.07
-5.45
-4.06
9.05
+0.74
+1.28
+3.57
-0.70
-8.72
-4.64
consultancy, technical services, dividends, profit & interest payments. Thus, net invisible surplus amounted to $ 50.5 B in AprDec 2007. Reflecting the developments in merchandise & invisible accounts, current account deficit (CAD) at $ 16.0 B was higher than $ 14.0 B in the corresponding period of the previous year.
Foreign Travel (net) Investment Income (net) Miscellane ous Receipts (net) Transfer Private (Net) TOTAL (Net) -3.4
1.4
1.4
1.2
2.4
-4.5
-5.0
-5.9
-6.6
4.3
7.7
13.7
24.2
27.9
16.4
21.6
20.5
24.5
27.9
17
27.8
31.2
42.0
53.4
Net Capital Inflows Net Capital Inflows surged by 172% to $ 81.9 B during AprDec 2007, as compared with $ 30.1B a year ago.
Net FDI increased to $ 8.4 B from $ 7.6 B in Apr- Dec 2006. Portfolio Investments by FII recorded a substantial increase of $ 33.0 B from $ 5.2 B an year ago. ECB increased to $ 16.3 B as against increase of $ 9.8 B during the previous year, in response rising financing requirements for domestic capacity expansion. NRI deposits registered a net outflow of $ 0.9 B as against an increase of $ 5.7 b in Apr- Dec 2006, responding to reduction in ceiling on interest rates of NRI deposits in April 2007. Net short term credit rose to $ 10.8 B as compared to $ 5.7 B an year ago. Net debt flows, in the form of external assistance, ECBs, NRI deposits & short term credit put together increased to $ 27.5 B in Apr- December 2007 from $ 20.2 B, in Apr- Dec 2006.
- This was mainly in ECBs ($15.3B) & short term credit ($ 8.8B) - Valuation changes due to depreciation of US$ accounted for $ 6.0B of the increase in external debt. - At end 2007, ratio of short term debt to total debt was 17.5% & the share of US$ debt was 54.5% in the total debt. India holds the third largest stock of reserves amongst the emerging market economies. According to RBI, Indias foreign exchange reserves are at a comfortable level & are consistent with the rate of growth, the share of external sector in the economy and the size of risk adjusted capital flows.