India Foreign-Exchange System
Sources: The Library of Congress Country Studies; CIA World Factbook
Despite its size, India plays a relatively small role in the world economy. Until the 1980s, the government did not make exports a priority. In the 1950s and 1960s, Indian officials believed that trade was biased against developing countries and that prospects for exports were severely limited. Therefore, the government aimed at self-sufficiency in most products through import substitution, with exports covering the cost of residual import requirements. Foreign trade was subjected to strict government controls, which consisted of an all-inclusive system of foreign exchange and direct controls over imports and exports. As a result, India's share of world trade shrank from 2.4 percent in FY 1951 to 0.4 percent in FY 1980. Largely because of oil price increases in the 1970s, which contributed to balance of payments difficulties, governments in the 1970s and 1980s placed more emphasis on the promotion of exports. They hoped exports would provide foreign exchange needed for the import of oil and high-technology capital goods. Nevertheless, in the early 1990s India's share of world trade stood at only 0.5 percent. In FY 1992, imports accounted for 9.3 percent of GDP and exports for 7.7 percent of GDP.
Based on trends throughout the 1980s and early 1990s, it appears likely that the balance of trade will remain negative for the foreseeable future (see table 19, Appendix). The 1979 increase in the price of oil produced a Rs58.4 billion deficit in FY 1980, close to 5 percent of GNP. The deficit was barely reduced in nominal rupee terms over the next five years, although it improved considerably as a share of GNP (to 2.3 percent in FY 1984) and in dollar terms (from US$7.4 billion in FY 1980 to US$4.3 billion in FY 1984). Pressure on the balance of trade continued through the late 1980s and worsened with the attempted annexation of Kuwait by Iraq in August 1990, which led to a temporary but sharp increase in the price of oil. In FY 1990, the balance of trade deficit reached a record level in rupees (Rs106.5 billion) and in dollars (US$6 billion). Import controls and devaluation of the rupee allowed the trade deficit to fall to US$1.6 billion in FY 1991. However, it widened to US$3.3 billion in FY 1992 before falling to an estimated US$1 billion in FY 1993. However, one optimistic sign, noted by India's minister of finance in March 1995, was that exports had come to finance 90 percent of India's imports, compared with only 60 percent in the mid-1980s.
No one product dominates India's exports. In FY 1993, handicrafts, gems, and jewelry formed the most important sector and accounted for an estimated US$4.9 billion (22.2 percent) of exports. Since the early 1990s, India has become the world's largest processor of diamonds (imported in the rough from South Africa and then fabricated into jewelry for export). Along with other semiprecious commodities, such as gold, India's gems and jewelry accounted for 11 percent of its foreign-exchange receipts in early 1993. Textiles and ready-made garments combined were also an important category, accounting for an estimated US$4.1 billion (18.5 percent) of exports. Other significant exports include industrial machinery, leather products, chemicals and related products (see table 20, Appendix).
The dominant imports are petroleum products, valued in FY 1993 at nearly US$5.8 billion, or 24.7 percent of principal imports, and capital goods, amounting to US$4.2 billion, or 21.8 percent of principal imports. Other important import categories are chemicals, dyes, plastics, pharmaceuticals, uncut precious stones, iron and steel, fertilizers, nonferrous metals, and pulp paper and paper products (see table 21, Appendix).
India's most important trading partners are the United States, Japan, the European Union, and nations belonging to the Organization of the Petroleum Exporting Countries (OPEC). From the 1950s until 1991, India also had close trade links with the Soviet Union, but the breakup of that nation into fifteen independent states led to a decline of trade with the region. In FY 1993, some 30 percent of all imports came from the European Union, 22.4 percent from OPEC nations, 11.7 percent from the United States, and 6.6 percent from Japan. In that same year, 26 percent of all exports were to the European Union, 18 percent to the United States, 7.8 percent to Japan, and 10.7 to the OPEC nations (see table 22, Appendix).
Trade and investment with the United States seemed likely to experience an upswing following a January 1995 trade mission from the United States led by Secretary of Commerce Ronald H. Brown and including top executives from twenty-six United States companies. During the weeklong visit, some US$7 billion in business deals were agreed on, mostly in the areas of infrastructure development, transportation, power and communication systems, food processing, health care services, insurance and financing projects, and automotive catalytic converters. In turn, greater access for Indian goods in United States markets was sought by Indian officials.
In February 1995, in a bid to improve commercial prospects in Southeast Asia, India signed a four-part agreement with the Association of Southeast Asian Nations (ASEAN--see Glossary). The pact covers trade, investment, science and technology, and tourism, and there are prospects for further agreements on joint ventures, banks, and civil aviation.
India's balance of payments position is closely related to the balance of trade. Foreign aid and remittances from Indians employed overseas, however, make the balance of payments more favorable than the balance of trade (see Size and Composition of the Work Force, this ch.).
The central government has wide powers to control transactions in foreign exchange. Until 1992 all foreign investments and the repatriation of foreign capital required prior approval of the government. The Foreign-Exchange Regulation Act, which governs foreign investment, rarely allowed foreign majority holdings. However, a new foreign investment policy announced in July 1991 prescribed automatic approval for foreign investments in thirty-four industries designated high priority, up to an equity limit of 51 percent. Initially the government required that a company's automatic approval must rely on matching exports and dividend repatriation, but in May 1992 this requirement was lifted, except for low-priority sectors. In 1994 foreign and nonresident Indian investors were allowed to repatriate not only their profits but also their capital. Indian exporters are also free to use their export earnings as they see fit. However, transfer of capital abroad by Indian nationals is only permitted in special circumstances, such as emigration. Foreign exchange is automatically made available for imports for which import licenses are issued.
Because foreign-exchange transactions are so tightly controlled, Indian authorities are able to manage the exchange rate, and from 1975 to 1992 the rupee was tied to a trade-weighted basket of currencies. In February 1992, the government began moves to make the rupee convertible, and in March 1993 a single floating exchange rate was implemented. In July 1995, Rs31.81 were worth US$1, compared with Rs7.86 in 1980, Rs12.37 in 1985, and Rs17.50 in 1990.
Data as of September 1995
NOTE: The information regarding India on this page is re-published from The Library of Congress Country Studies and the CIA World Factbook. No claims are made regarding the accuracy of India Foreign-Exchange System information contained here. All suggestions for corrections of any errors about India Foreign-Exchange System should be addressed to the Library of Congress and the CIA.