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International Journal of Economics

A Study on Impact of Foreign Trade in

India in The Post Liberalisation Era
Dr. A. Gopalakrishnan
OPEN ACCESS Associate Professor & Research Advisor, Department of Economics
Periyar E.V.R. College (Autonomous), Tiruchirappalli, Tamil Nadu, India

Volume: 6 A. Mahalakshmi
Associate Professor, Ph.D. Part-time Research Scholar,
Department of Economics, Periyar E.V.R. College (A), Tiruchirappalli, Tamil Nadu, India
Issue: 3
Abstract
Month: June Foreign trade makes a signicant contribution to the economy growth of a country. The policy
regime in India about the liberalization of the external sector has brought tremendous changes in
India’s foreign trade. So, the present study attempts to analyze the trend and composition of trade
Year: 2018 since 1991 and also to analyze the impact on the economic growth of India. The study reveals that
though the total exports and imports both have increased the growth rate of imports is more than
ISSN: 2319-961X the growth rate of exports. It is also noted that manufactured goods compose the major portion
of the export goods while petroleum and crude products contribute the major portion of the
imported goods. The study also reveals that import has a negative inuence on economic growth
Received: while export and economic openness are positively related to the economic growth of India.
4.04.2018 Keywords: Economic Growth, Economic Openness, Growth Rate, Export and Import

Accepted: Introduction
15.06.2018
Foreign Trade is very crucial for a country’s economic development as
Published:
it has made an increasingly signicant contribution to economic growth and
28.06.2018 substantially to the economic welfare of the people. The foreign trade of a
country consists of the inward and outward movement of goods and services,
Citation: which results in outow and inow of foreign exchange from one country
Gopalakrishnan, A., & to another country. No country in the world possesses the adequate facilities
Mahalakshmi, A. (2018). A for economical production of all the goods and services that are consumed
Study on Impact of Foreign by its people. This implies that no country is self-sufcient in the sense that
Trade in India in The Post no country can produce all the goods that it needs. Hence, the need to trade
Liberalisation Era. Shanlax with each other arises. Economies of scale and international specialization
International Journal of which is also the fruits of scientic and technological progress in the world
Economics, 6(3), 1–7. would become more easily accessible through foreign trade (Agarwal, 1975).
Developing countries need more goods to feed a rapidly growing population.
DOI:
Exports can be a leading sector in growth. It implies that increased earnings
https://doi.org/10.5281/
from the higher marketability of a country’s commodities in the international
zenodo.1299161
market would stimulate the indigenous industrial activity within the country.
This, in turn, brings many distinct benets, viz., greater utilization of resources,
larger employment opportunities, more foreign exchange, etc.

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It was thus considered that foreign trade would 2. To examine the role of foreign trade in
make an impressive contribution to a country’s economic growth of India.
development; hence it is considered to be not simply
a device for achieving productive efciency; but also Methodology of the Study
an engine of growth. International trade has now The study is based on secondary data collected
become a vital part of development strategy, and it from Statistical Handbook published by RBI. To
can be an effective instrument of economic growth, examine the trend and composition of foreign trade
employment generation and poverty alleviation in an in India after New Economic Policy of 1991 simple
economy. statistical tools like growth rate, percentage share
calculations, and simple diagrams have been used.
Necessity of the Study The growth rates of exports (ΔX/X), Import (ΔI/I)
As a result of long-term poor economic and GDP (ΔI/Y) are obtained by using the following
performance under protectionist policies, many formula:
developing countries including India started
removing their barriers to international trade in the
late 1980s with an aim to improve the economic
development of the country. During the time of
independence, the foreign trade of India was typical where Grt is the growth rate of variable Y for tth
of that of a colonial and agricultural economy, and time period compared to its previous year and, it is
the trade relations were mainly conned to Britain represented as percentages.
and other Commonwealth countries. During the To examine the role of foreign trade in economic
period 1950 -1990, foreign trade of India suffered growth of India, linear regression model has been
from strict bureaucratic and discretionary controls. used where Gross Domestic Product (GDP) at
Although the Indian foreign liberalization era factor cost at constant price is taken as a measure
started in 1970’s but only in the late 1980’s and of economic growth; and volume of export, import
early 1990’s, drastic changes have started taking and economic openness in monetary terms are taken
place as far as Indian foreign trade is concerned. In as variables of the study. Before applying Ordinary
1991, the Government of India introduced series of Least Squares (OLS) method, the stationary of the
economic reforms to liberalize and globalize Indian concerned variables is tested using Augmented
economy. Since the initiation of economic reforms, Dickey Fuller (ADF) Test. The following model
India’s outward orientation has started increasing. is applied here examine the impact of trade on
The Indian trade policy experienced various changes economic growth
from time to time after its initiation and the major Yt = α + β1Xt + β2Mt + β30t + ut t = 1, 2, 3,....
changes included simplication of procedures, ........................., 22.
removal of quantitative restrictions and substantial where α and βs are the coefcients and ut is the
reduction in the tariff rates. The policy regime in error term which follows the normal distribution
India about the liberalization of the external sector with mean zero and variance σ2.
has brought tremendous changes in Indians foreign Yt is the Gross Domestic Product in period t, Xt
trade. Thus, it is in this connection that the present is the export in time t. Mt is the import in time t.
study aims to analyze the trend and composition of It is the economic openness in time t. The openness
the foreign trade since 1991. variable is measured as exports plus imports divided
by GDP [O = (X + M)/GDP].
Objectives
The study aims to achieve the following specied Results and Discussion
objectives: The ndings of the study are divided into two
1. To analyze the trend and composition of sub-sections according to the objectives of the study.
foreign trade in India since 1991. Trends and Composition of India’s Foreign Trade

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The impact of trade reforms is apparent from 01. However, the global economic slowdown and the
the changing structure of India’s Foreign Trade in events of September 11, 2001 led to a steep fall in the
terms of trend and diversity of market and products. rate of growth of exports to 2.7 percent during 2001-
Figure1 presents the growth rates of GDP, total 02. The period since 2002-03 has recorded a steady
exports and total imports measured over the period export growth rate up to 2008-09. India’s exports
1991-92 to 2014-15. During the 1990s, Indian reached Rs. 8407.55 billion in 2008-09 and to Rs.
exports have performed well in certain years, and 8455.34 billion in 2009-10. Thus, the growth of
not so well in some other years. The growth rate exports declined to 0.6 percent in 2009-10 in view of
was high in 1993-94 and 1995-96 at 29.9 percent the global meltdown. But in 2010-11, exports made
and 28.6 percent respectively, but declined sharply a huge jump up to Rs. 11429.22 billion and thus the
in 1996-97 to 11.7 percent, and continuously till growth rate of export recorded the highest of 35.2
1998-99 on account of the South East Asian crisis percent. However, the cumulative value of exports
and Worldwide recession. It again recovered to in 2014-15 was Rs. 18964.45 billion and registered a
14.2 percent in 1999-2000, and reached the highest growth rate of -0.4 percent (Table 1).
growth rate for the decade at 27.6 per cent in 2000-

Table 1: Trends of India’s Foreign Trade (Rs. in Billion)

Gross Growth Growth Growth

Trade
Year Domestic Rate Export Rate Import Rate
Balance
Product (in %) (in %) (in %)
1991-92 613,528 - 440.42 - 478.51 - -38.09
1992-93 703,723 14.7 536.88 21.9 633.75 32.4 -96.87
1993-94 817,961 16.2 697.51 29.9 731.01 15.3 -33.5
1994-95 955,386 16.8 826.74 18.5 899.71 23.1 -72.97
1995-96 1,118,586 17.1 1063.53 28.6 1226.78 36.4 -163.25
1996-97 1,301,788 16.4 1188.17 11.7 1389.20 13.2 -201.03
1997-98 1,447,613 11.2 1301.01 9.5 1541.76 11.0 -240.75
1998-99 1,668,739 15.3 1397.53 7.4 1783.32 15.7 -385.79
1999-00 1,858,205 11.4 1595.61 14.2 2152.37 20.7 -556.76
2000-01 2,000,743 7.7 2035.71 27.6 2308.73 7.3 -273.02
2001-02 2,175,260 8.7 2090.18 2.7 2452.00 6.2 -361.82
2002-03 2,343,864 7.8 2551.37 22.1 2972.06 21.2 -420.69
2003-04 2,625,819 12.0 2933.67 15.0 3591.08 20.8 -657.41
2004-05 2,971,464 13.2 3753.40 27.9 5010.65 39.5 -1257.25
2005-06 3,390,503 14.1 4564.18 21.6 6604.09 31.8 -2039.91
2006-07 3,953,276 16.6 5717.79 25.3 8405.06 27.3 -2687.27
2007-08 4,582,086 15.9 6558.64 14.7 10123.12 20.4 -3564.48
2008-09 5,303,567 15.7 8407.55 28.2 13744.36 35.8 -5336.81
2009-10 6,108,903 15.2 8455.34 0.6 13637.36 -0.8 -5182.02
2010-11 7,248,860 18.7 11429.22 35.2 16834.67 23.4 -5405.45
2011-12 8,736,039 20.5 14659.59 28.3 23454.63 39.3 -8795.04
2012-13 9,946,636 13.9 16343.18 11.5 26691.62 13.8 -10348.4

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2013-14 11,236,635 13.0 19050.11 16.6 27154.34 1.7 -8104.23

2014-15 12,433,749 10.7 18964.45 -0.4 27370.87 0.8 -8406.42
Source: Various Issues of Handbook of Statistics on the Indian Economy, Reserve Bank of India

Fig 1: Growth Rates of Imports, Exports, and GDP

In case of imports, it crossed Rs. 1000.00 billion registered a growth of 0.8 percent.
for the rst time in 1995-96 and then it declined Liberalization and trade reforms have also led to
steeply. The growth rate of imports was low in 2001- some changes in the composition of India’s foreign
02 (Table 1). It regained in 2002-03 and had grown trade. The composition of foreign trade implies the
steadily after that and touched 39.5 percent in 2004- composition of exports and imports of a country.
05 and then declined up to 20.4 percent in 2007-08. Exports bring out the fact about the goods that a
In 2008-09, the growth rate again touched by 35.8 country has and how much of these it can and are
percent. But deceleration started from October 2008 willing to sell, and import indicates what types of
and led to a negative growth rate of -0.8 percent in goods a country lacks and how much of them it
2009-10. It regained in the consecutive year and can get. The composition of foreign trade related to
reached the maximum of 39.3 percent in 2011- exports and imports of different commercial products
12. However, the cumulative value of imports for are shown in Figure 2 and Figure 3.
the period 2014-15 was Rs. 27370.87 billion and

Figure 2: Commodity Composition of India’s Export

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The highest share in total export is of include cereals and cereal preparations, edible oils,
manufactured goods followed by primary goods. But pulses, etc. and other bulk imported items while the
it is also observed that from 2000-01, the share of non-bulk imports are composed of capital goods,
manufactured goods is continuously falling. On the export -related items which include pearls and
other hand, from the same year, the percentage share precious stones, organic and inorganic chemicals,
of petroleum products to total export is increasing textile yarn, fabrics, sugar, and nally other imported
continuously. It is also seen that over the periods non-bulk items. It is observed from gure 3 that the
1991-92 to 2012-13, primary products experience share of non-bulk imports to total import is higher
uctuations in its share to total export and the than the share of bulk imports to total imports. Under
percentage of other exported goods constitutes a bulk imports share of petroleum, crude and products
small share to the total export The primary products are the highest followed by other bulk items. The
are composed of agriculture and allied products and share of bulk consumption goods to total bulk
ores and minerals while the manufactured goods are imports is the lowest. It is also seen that under non-
composed of leather and manufacture, chemicals bulk imports, the share of capital goods is the highest
and related products, engineering goods, gems and followed by the share of other items. The share of
jewellery, handicrafts, textile and textile products export-related goods and other non-bulk imports
and other manufactured goods (Figure 2). experience uctuations in its share to total non-bulk
Total bulk imports are composed of petroleum, imports. Bulk consumption goods capture the lowest
crude, and products, bulk consumption goods which share in total imports (Figure 3)

Figure 3: Commodity Composition of India’s Import

Impact of Trade on Economic Growth order of integration. To identify the stationary of

Using non-stationary variables in the model might the variables under study Augmented Dickey-Fuller
lead to the spurious regression which cannot be used (ADF) test is applied. Table 2 shows the result of
for precise prediction (Gujarati, 2003). Hence, our unit root test and the order of integration. It is seen
rst step is to determine whether the variables have that all the variables are stationary.
unit roots, that is, whether it is stationary and the

Table 2: Unit Root Test Summary Statistics (Augmented Dickey-Fuller)

ADF Test Critical Values Order of
Variables
Statistics 1% 5% 10% Integration
GDP 4.439 -3.750 -3.000 -2.630 I(0)
Export 5.155 -3.750 -3.000 -2.630 I(0)

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Import 5.004 -3.750 -3.000 -2.630 I(0)

Economic
2.666 -3.750 -3.000 -2.630 I(0)
Openness
Source: Calculated on the basis of Statistical Handbook on Indian statistics 2012-13.

Table 3 presents the result of the regression dependent variable is explained by the independent
analysis depicting the impact of foreign trade on variables of the model. The one percent variation
economic growth. The value of R2 in the model is 0.98 in the dependent variable remains unexplained by
which shows that 98 percent of the variation in the independent variables of the study.

Table 3: Impact of Trade on Economic Growth (GDP)

Variables Co-efcient t-values Prob. Value ANOVA
Intercept 8505.06* 6.619472 0.00000
Export 4.396539* 2.961271 0.00836 R2 = 0.987 Adj.
R2 = 0.985 F Stat.
Import -3.45091* -4.23555 0.000497
= 460.549*
Economic Openness 96288.33* 7.340794 0.00000
Source: Calculated by Statistical Handbook on Indian Statistics 2012-13.
Note:* denotes parameters are signicant at less than one percent.

The adjusted R2 shows that asymptotically the of Indian exports is in manufactured goods. The
variables can explain approximately 98 percent of composition of India’s imports has also grown
the total variation. The implication is that the model up signicantly. It has also shown a positive and
has the goodness of t. F-statistic tests the overall increasing trend during the period under study. The
signicance of the model under study. The value share of imports of petroleum and crude products and
for the F-statistic is 460.54 and is signicant. The other non-bulk items have increased signicantly
result of regression analysis shows that export and while the imports of food grains and export-related
economic openness have the signicant positive items have declined. The study also indicates that
impact on GDP while import has a negative impact post liberalization era has certainly helped India in
on GDP. The results conrm the importance of achieving high growth in the economy as there has
foreign trade on expansion and growth of Indian been a rapid growth of imports of capital goods and
economy. Although import is negatively related technical raw materials to meet the requirement of
with GDP, the overall impact of trade on economic industrialization and growing imports of petroleum
growth represented by economic openness is positive products for meeting industrial and consumption
and highly signicant (Table 3). requirement. It is also found that though import
has a negative inuence on economic growth, the
Conclusion
volume of trade reected by economic openness has
Over the study period, it has been observed
a positive impact on the economic growth of India
that total exports of India have increased since
and its magnitude is increasing continuously.
the adoption of New Economic policy in India.
Although India is facing a continuous decit in
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