The changing face of India’s foreign trade

The last 5 years data for International Trade, depicts a clear trend. India’s key trade partners are changing rapidly. First of all, the volume of international trade has expanded rapidly from $95 billion in 2001-02 to $252 billion in 2005-06. This is a remarkable growth (21.5% CAGR) and is one of the key drivers of economic growth. International trade in value terms is still about 1/3 of the GDP, so there is considerable room for continued expansion of International trade.

A look at some of the leading trade partners during this period shows the remarkable growth in trade with China. China, from nowhere, is now the second most important trade partner for India (figures in $ millions).

It looks likely that in another 5 years China will be as important as The US for India as a trading partner. The diagram below shows the increase in trade with some of the leading partners.

Clearly China, Korea, Singapore are integrating much faster with India, than the erstwhile mainstays – USA, Japan and UK. The USA, is of course such a large partner, and the base effect in its case was higher. However, the trends clearly show an increased Eastward focus. This is even more apparent when one starts looking at the figures for other ASEAN countries.

The importance of social development

The story of India and China has spun off several debates and a lot of it has focused on stuff like Chinese commitment, Indian apathy, the questioning of the readiness of a society for democracy and an assertion that somehow democracy has been holding India back.

Much of these debates ignore social development as a prerequisite to economic development. It is said that the size of the two economies were comparable 15 years ago. True, But what is lost is that the social indicators in China, 15 years ago, were superior to what India has today. Is it any surprise really that China has powered ahead. Economics would have turned on its head if India had somehow managed to match China in spite of this obvious gap.

The world development report gives interesting insights into the India China debate. Let us look at some of the broad indicators

a) Average life expectancy – In 1990 this was 59 years for India and 69 years for China. By 2003 India had moved to 63 and China to 71. India is still behind China of 1990.

b) Infant Mortality (per 1000 live births) - In 1990 this was 84 for India and 38 for China. By 2003 India had moved to 63 and China to 30. India is still behind China of 1990.

c) Adult Literacy (%) - In 1990 this was 62 for India and 87 for China. By 2003 India had moved to 68 and China to 95. India is still behind China of 1990.

If anything, the above set of figures, demonstrate the ability of a democratic system to deliver benefits faster. It is obvious that India cannot hope to better China with the handicap of poor social development. It is also apparent that policy makers need to focus on social development. An educated, healthier population will take care of itself in a democratic economy.

The above argument is reinforced when one looks at social indicators across India. The laggard states are those with significantly inferior social development. All these states function under the same overall economic and democratic framework. Yet the states that are healthier and more literate have been powering ahead and leading the economic growth.