Monday, July 5, 2010

Foreign Trade (1)

India, with the 2nd largest population, is the most favorable export destination of the world. Today all the major economies are interested in expanding their relationships with India and trade is playing a stabilizing role. One of the main reason for this policy shift is India’s huge market of 1.2 billion people. Today if each of us gives rupee 1, we will be able to collect 1.2 billion rupees and that’s a huge amount to be used for any purpose. This fact is very well recognized by the western as well as Asian economies and they are framing their policies accordingly. Least barriers to foreign trade, favorable fiscal and monetary policies, floating exchange rate system, government commitment towards trade expansion are some the factors responsible for India’s growing clot in the world economy. Today India’s forex accounts for 277 billion USD and its 6th largest in the world.

The dramatic increase in trade deficit in the recent years is a matter of concern today. Trade deficit has already crossed 80 billion USD. This is not of major concern if import consists of machinery or raw material but of great worry if import consists of finished goods. More import of finished goods indicates weak status of Indian industry and this is the scenario India is experiencing from the last few years. Is growing trade deficit indicates the failure of economic liberalization in India? The answer is no, although the trade deficit is increasing which also indicates the increase in current account deficit but our capital account transactions are much on positive side and offsetting current account deficits and we are able to maintain favorable BOP and increasing foreign exchange reserves .

India and china

Today economic factors plays a very important role in India’s engagement with china. The dramatic increase in bilateral trade in recent years has provided a much needed stabilizing agent which doesn’t exist earlier. The bilateral trade has crossed 52 billion USD in 2008 despite the economic slowdown, it was 38 billion USD in 2007. President Pratibha Devisingh Patil said during its recent visit to china that India plans to achieve 60 billion dollars in bilateral trade with China in 2010.

But a growing trade doesn’t signifies a political warmth as in the case of china and japan. According to critics the growth in bilateral trade is in highly unsustainable pattern. In 2008, more than 50% of Indian exports to china comprised of one item ie iron ore. If other primary commodities are added 85% of India’s export to china are raw material for the rising industrial might of china. In return India imports Chinese processed goods to the extent that it has become import dependent on china specially on steel tubes and pipes. More over the trade gap is also galloping with each passing year.

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