International Trade Policy of India

International trade plays an important role in enriching the economic growth of any nation. Through specialization and division of labor, trade promotes efficient utilization of scarce resources. Since trade is part of a country’s Gross National Product (GNP), it plays a pivotal role in providing employment, raising standard of living, and enabling consumers to choose from a wider set of goods and services.  Trade policies, in turn, decide the path and course of international trade by setting barriers, providing incentives to domestic producers, and promoting trade relations with various nations. For this reason, vigorous foreign trade policies and government reforms are of great importance for enabling efficient trade and economic practices. As the Indian economy continues with its recovery from COVID-19 which left almost every sector grappling and struggling for sustenance, the significance of appropriate trade policy becomes even more crucial.

Overview of International Trade of India

According to data by the Ministry of Commerce and Industry, India’s merchandise exports between April 2021 and August 2021 stood at $164.10 billion while imports at the same time were estimated to be around $219.63 billion. Trade to GDP ratio for India in 2020 was 36.47% which is a 2.92% decline from 2019. The following line graph shows the Trade-GDP ratio for India for the period of 2000-2020 –

  Source: World Bank data bank

As evident from the above graph, the share of trade in Indian GDP has been declining since 2011. Though the recent dip in the percentage can be explained by the strike of COVID -19, the long-run declining trend needs careful attention and immediate cure.

Top exports of India as of May 2021 include Petroleum Products ($5.28B), Pearl, Precs, Semi Precious Stones ($2.17B), Iron and Steel ($1.69B), Drug Formulations, Biologicals ($1.43B), and Ship, Boat and Floating Struct ($976M). Imports include Crude ($7.24B), Pearl, Precs, Semi Precious Stones ($2.23B), Petroleum Products ($2.14B), Coal, Coke and Briquettes ($1.97B), and Vegetable Oils ($1.42B)[1]. The following table shows the top import and export destinations of India (data of May 2021) –

Export destinations of IndiaImport destinations of India
United States ($5.4 B)China ($7.08B)
United Arab Emirates ($2.27B)United States ($3.15B)
China ($2.14B)United Arab Emirates ($2.37B)
Singapore ($1.35B)Iraq ($1.97B)
Hong Kong ($1.04B)Saudi Arabia ($1.75B)

India uses a mix of tariff and non-tariff barriers with simple average MFN rate standing at 15.53% (as of 2019),[2] non-tariff measure (NTM) coverage ratio 45.2%, and frequency ratio 43.7%[3]

International Trade Policy of India

The Ministry of Commerce and Industry announced “New Foreign Trade Policy (FTP), 2021-26 which came into effect on 1st April 2021. A number of changes were introduced in the policy framework compared to the last trade policy which was launched on 1st April 2015. The previous policy regulations focused on increasing goods and services export, generating sufficient employment opportunities and promoted some initiatives in line with these objectives like “Make in India”, “Skill India”, “Digital India”, “Start-up India” and “Ease of doing business”. On the contrary, the new policies were designed keeping in mind the objective of making India a leader in the area of international trade and channelizing the synergies gained through merchandise and services exports for growth and employment with a goal to make India a USD 5 Trillion economy. The Services Export from India Scheme (SEIS) was continued in the latest trade policy which aimed at incentivizing domestic service exporters through providing 5-7% Incentive on Net foreign income in the form of duty credit scrips for eligible exports. However, considering the unprecedented situation brought about by the pandemic, the government decided to continue the relief packages under various export promotion schemes by another year. The new foreign trade policy aims –

  • To address the constraints related to regulatory and policy framework in order to minimize the transaction cost and promote ease of doing business. These measures are envisaged to boost exports in the long run by creating a low-cost operating environment.
  • To help the districts emerge as export hubs. The initiative would be implemented in a phased manner with the aim of mobilizing the potential of each district to achieve its potential as an export hub.
  • To correct the persistent trade imbalance of India through improvising the infrastructure of domestic services and manufacturing sector.

Despite these commendable approaches adopted in FTP 2021-26, the framework failed to meet expectations of various stakeholders by not providing enough emphasis on boosting export capacity of MSME sectors. Apart from this drawback, other ambitious infrastructural and logistical developmental initiatives promised in the new policy augurs well for the trade and economic sector in the years to come. The current economic strengths of India have been attributed to its standing as one of the most sought-after destinations of foreign investments in the world. Prompt response to international opportunities is required for optimal exploitation of trade relations. For instance, the recent visits of India’s External Affairs Minister S. Jaishankar has paved way for repairing India-China relations through mutual respect, sensitivity, and interest. Bilateral trade opportunities between the nations have boomed in recent times with Indian Pharma sector witnessing a breakthrough in China. Trading relations with China has remained largely immune to the border crisis. Thus, it is important for Indian economy to maintain the bilateral ties through cordial relation and be prompt in capturing any opportunity.

India in World Trade Organization (WTO)

India, one of the founding members of WTO, has always played an integral role by cooperating in the forum to ensure seamless trade among all countries and promote minimal tariff and non-tariff barriers. India has not only settled a number of trade disputes with other nations but has also participated in a rule-based system of governance in WTO which is envisaged to lead to bring prosperity for the nation.

  • Issues about Public Stock Holding and Minimum Support Price (MSP) at WTO

The biggest threat in front of India, in the forum, is related to its continuation of MSP. The country has already breached the maximum subsidy limit (fixed at 10% of the value of production) and is seeking a permanent solution. India, supported by China, the African group, and the G33 group of developing nations, has pushed the issue in the last Ministerial meeting held in 2017 at Buenos Aires, Argentina. The conference concluded without any permanent solution to the issue.[4] With the 12th Ministerial Conference scheduled next month, the countries are insisting on a permanent solution covering all aspects of the problem. However, other members of WTO like the UK and Canada is not ready to provide consensus on the matter without further information proving the need of public stock holding and proper evidence on food shortage. Domestic farmer distress pushing continuation of MSP coupled with international non-cooperation can endanger agricultural sustainability of the country. Hence, India needs to step up on firm footing to seek a permanent solution and protect the interest of domestic farmers.

  • Issues on tariff and non-tariff barriers

India is often criticized for imposing high tariff barriers which impede imports. Even WTO has remarked India’s Most Favored Nation (MFN) tariff to be one of the highest among major economies. Tariff structure of India is often referred to as complex and non-transparent as it consists of multiple rounds of surcharges. To overcome such procedural difficulties and reduce processing time, the government of India is increasing use of electronic mediums and building a single window for customs documents. Also, the ad-hoc and arbitrary change of custom rates along with numerous random exemptions renders towards making the environment complex to administer.

               Among non-tariff measures, India uses production subsidies, Sanitary and Phytosanitary (SPS) measures, technical barriers to Trade (TBT), import licensing, and other barriers on services. In recent times, India has aggressively increased its application of anti-dumping laws. However, in many cases, it has failed to justify the application of such measures and has been blamed for having a protectionist intent. The following graph shows the top 10 NTMs used by India and the number of products subjected to those NTMs –

Data Source: World Integrated Trade Solution (WITS)

Trade Agreements of India

India has been constantly trying to engage at regional as well as multilateral levels to increase economic cohesion. These negotiations are complementary to WTO rule-based negotiations and aim at strengthening political and economic ties through facilitating trade creation. India enjoys preferential treatment through PTA and FTA with the following countries– Bhutan, Nepal, Japan, Afghanistan, and South Korea[5] while many more negotiations are still being proposed. The free trade agreements of India are listed as follows –

Free Trade Agreements of India
1. Agreement on South ASEAN Free Trade Area (SAFTA)
2. India – Singapore Comprehensive Economic Cooperation Agreement (CECA)
3. India – South Korea Comprehensive Economic Partnership Agreement (CEPA)
4. India – ASEAN Trade in Goods Agreement
5. India – Japan Comprehensive Economic Partnership Agreement
6. India – Malaysia Comprehensive Economic Cooperation Agreement
7. India- Sri Lanka FTA (ISLFTA)
8. Revised Indo-Nepal Treaty of Trade

The benefits of trade agreements accrue to the exporters as well as the consumers (in terms of lower prices). A lower level of tariff in the international market increases competitiveness of domestic goods. It contributes towards the growth of exports through providing better market access. Also, trade risk diversification is made possible through trade agreements. Diversification of both product basket and countries help in hedging unfavorable consequences of global trade brought about by geopolitical turmoil. Increased competition from international exporters pushes domestic firms towards innovation and competition.

However, it has always been argued by economists that trading partners of India benefit disproportionately more than India in most of the trade agreements, leaving India worse-off than before. Experience shows that India’s trade deficit has always widened with countries after signing FTAs with them. Therefore, to exploit these agreements to their maximum possible extent, it becomes necessary to design proper negotiation strategies and actively put forward domestic priorities in early stages of participation. India’s pull out from the 16 members mega trade deal of Regional Comprehensive Economic Partnership (RCEP) has proved the country’s ability to negotiate on firm footing. Since India’s interest in the areas of services, manufacturing, agriculture, and dairy sectors was not protected and it threatened the Indian market for being flooded by low-priced Chinese products, the government decided to suspend its participation and protect the domestic market from the vagaries of unequal competition.

Recommendations and Way Forward

India can leverage its potential of economic growth through international trade only if it is guided by appropriate policy framework and regulations. Considering the current situation of inflamed emergency brought about by the pandemic, it becomes even more important to design a comprehensive policy framework encompassing factors that are crucial for the growth of exports. Following are some policy recommendations that may be considered – 

  • Emphasis on the growth of exports of MSME sector through providing appropriate policy incentives. Since the sector has demonstrated remarkable resilience in face of tumbling economic conditions, unlocking the potential of the sector would ensure long-term sustainability of export growth.
  • Push for permanent solution for MSP and public stock holding in WTO. Since it is being difficult for India to use the interim “peace clause” as a subject in numerous notification requirements, the country needs to deploy a plan to find a permanent solution in the 12th Ministerial conference of WTO.
  • Increase transparency of trade barriers and remove procedural complexities. To help its trading partner get efficient market access and avoid any future disputes in WTO, the country needs to simplify and digitize these procedures.
  • Ensure gains from trade agreements before signing them. As India has set an example by pulling out of RCEP for not safeguarding its interest, it should continue doing so through participating actively in trade negotiations.
  • Addressing the interest of corporates in trade policy. The political economy of trade policy in India has been influenced by the interest of MNCs in very few instances. Pull out from RCEP was an exemplary instance where government responded to the demands of large manufacturers and corporates. This practice of internalizing interest of various stakeholders should be followed while designing the country’s trade policy as well.

India must strike an optimal balance between domestic protection and international cooperation through trade facilitation to ensure long run export growth and economic development. Internalizing the interest of various stakeholders while formulating the periodic trade policy should be considered for domestic welfare.


[1] Source: Observatory of Economic Complexity (OEC)

[2] Source: Worldbank.org

[3] Source: World Integrated Trade Solutions (WITS)

[4] Source: Report by Ministry of Commerce and Industry, Trade Policy Division

[5] Source: Trade Promotion Council of India