The Indian economy has seen dramatic changes in the last 20 years, thanks largely to the economic reforms introduced by the P V Narasimha Rao government in 1991. One way of measuring that change would be to see how India’s merchandise trade has performed in this period.
Some changes are so obvious that you cannot miss them. For instance, exports have grown rapidly. At $18 billion in 1991-92, they were about seven per cent of India’s gross domestic product (GDP). By 2010-11, exports increased to $246 billion, equivalent to 14 per cent of GDP.
Imports, too, grew fast in this period — from about $20 billion or eight per cent of GDP in 1991-92 to $350 billion in 2010-11, amounting to almost 20 per cent of GDP. If India managed to keep growing and remain stable in spite of a sharp rise in trade deficit in this period, it is mainly because the reforms opened up the economy. This helped the country to receive large flows of foreign capital – both through direct investment in projects and through portfolio investments in the capital markets – and meet its balance of payments gap.
Several other changes are not too obvious and remain hidden in the trade data. In 1990-91, machinery was the second-largest import item, valued at around $5.83 billion and accounting for about 24 per cent of India’s total imports of $24 billion. Twenty years later, machinery imports are much higher, but account for only about 11 per cent of India’s total imports. This is a sign as much of India’s growing domestic machinery manufacturing capacity as of the economy’s rising demand for capital goods. Clearly, India’s import basket has grown and diversified in these 20 years.
Two items that did not even figure in India’s import basket in 1990-91 (indeed, they did not do so until 1993-94) but acquired a sizeable 10 per cent share in 2010-11 were gold and silver. The economic reforms of 1991 paved the way for legal imports of gold and silver and in the next 20 years, India has emerged as the world’s largest destination of gold and silver exports.
The petroleum sector presents perhaps the most interesting change. Petroleum imports, which used to account for about a fourth of the country’s total imports in 1990-91, accounted for about 30 per cent of India’s total imports in 2010-11. That indicates how India’s domestic oil and gas producers failed to step up domestic output, in keeping with the rising demand at home. This led to the sharp rise in the oil import bill.
However, that is only part of the story. The rise in the oil import bill was also because several new refinery capacities came up in this period and began to import crude oil and export petroleum products. That led to a dramatic rise in India’s petroleum product exports in the last 20 years. From $0.52 billion (about three per cent of total exports) in 1990-91, petroleum product exports rose to account for more than a 17 per cent share in total exports in 2010-11. Indeed, if exports are taken into account, the net import bill on account of the petroleum sector has seen modest growth and its share in the country’s total imports has declined in this period.
On the exports front, there are a few more surprises. Agriculture and textiles, which used to account for 42 to 44 per cent of India’s total exports in the early nineties, are no longer the key drivers of India’s merchandise exports. The share of textiles in India’s total exports has fallen to less than 10 per cent and that of agriculture to seven per cent. While gems and jewellery have held ground in the last two decades, the smartest recovery took place in the engineering sector, a development that has surprised even policy makers in the government.
In 1990-91, engineering goods exports were worth $2.2 billion or 12 per cent of total exports. In 2010-11, such exports accounted for over 24 per cent. The growth rates for engineering exports in the last few years have also been impressive, making this the largest foreign exchange earning sector, even ahead of software, which fetched $59 billion in 2011.
Clearly, such growth in engineering goods exports cannot take place just because exporting firms used some incentives or concessions. India’s manufacturing sector has certainly acquired a competitive edge that helps it enter export markets with relative ease. That advantage is not likely to go away easily. Nor should, therefore, anyone fear that discontinuing the duty entitlement passbook (DEPB) scheme would put brakes on engineering exports. The total annual value of the DEPB scheme is only Rs 8,000 crore, so it cannot sustain the kind of rise in engineering exports the country saw in recent years.
The story of India’s exports and imports in the last 20 years will undoubtedly have many lessons for the government. As the country prepares to celebrate the 20th anniversary of India’s economic reforms of 1991, a study of how the composition of India’s exports and imports changed over these years is an exercise the government’s current policy makers will find hugely useful.
