India as a Trading Nation

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By Sanjaya Baru

India’s current trade protectionism is inconsistent with its history of being a major trading nation. Future trade policies need to be mindful of India’s past.

Keywords: Trade policy | Free Trade Agreement | Regional Comprehensive Economic Partnership | Atmanirbharata | Protectionism | Indian Ocean | British Colonialism | Ancient Indian Trade

A series of policy decisions and statements over the past couple of years by the Narendra Modi government with respect to trade and industrial policy have raised questions about India’s openness to international trade. A change of direction in trade policy has been signaled through criticism of existing bilateral free trade agreements (FTAs); a freeze on future FTAs; an increase in tariffs; the decision to withdraw from negotiations towards an Asia-wide plurilateral trade agreement called the Regional Comprehensive Economic Partnership (RCEP); the enunciation of a new policy of self-reliant industrial development under the rubric of atmanirbharata; and, the promotion of Make in India through a campaign dubbed “vocal for local”.

In part, some of this has been a response to two important external challenges. First, the ballooning trade deficit with China and the latter’s unwillingness to address India’s concerns. Second, growing protectionism in the developed economies in general but the United States in particular. The “return of reciprocitarianism”^[1] under President Donald Trump, the marginalisation of multilateralism in trade with the deliberate weakening of the World Trade Organisation (WTO), and a targeted attack on India through the withdrawal of the Generalised Scheme of Preferences (GSP) have also contributed to demands in India for a more inward-oriented trade and industrial policy. The Swadeshi Jagran Manch has been at the forefront of this demand.

Apart from the Prime Minister’s recent statement on self-reliance, most of the developments listed above predate the disruption to international trade caused by the Covid-19 pandemic. The latter has only strengthened a pre-existing view on trade within the ruling Bharatiya Janata Party. The SJM has explicitly criticised the policy of trade liberalisation adopted since 1991, especially the various FTAs India has signed with a clutch of Asian economies. While some in government deny that India is returning to a pre-1991 policy of inward-orientation, the fact is that there is considerable confusion both at home and abroad about the direction Indian trade policy wishes to take. The government has to clarify its thinking so as to transmit accurate policy signals.

Prime Minister Modi told the Confederation of Indian Industry (CII) in June 2020, “The country now needs to manufacture products which are ‘Made in India’ but are ‘Made for the World’.”

At least one reason why there is a need for clarity on the future direction of trade policy is that investment decisions both by Indian and overseas firms will be influenced by it. India is seeking more foreign direct investment, urging firms exiting China to relocate to India and also urging multinationals to ‘make in India’ and ‘make for the world’ in India. Prime Minister Modi told the Confederation of Indian Industry (CII) in June 2020, “The country now needs to manufacture products which are ‘Made in India’ but are ‘Made for the World’.” This implies India seeks export-oriented FDI. Firms will then consider what access the Indian economy offers to the international market, both to import intermediates and export final products. Linking Indian manufacturing to global value chains (GVCs) implies that even a ‘make in India’ platform would entail both imports and exports.

It is useful to recall the long history of India as a global trading power if only to underline the point that the brief era of inward-orientation, between 1958 and 1991 – both years marked by a balance of payments crisis – was an aberration in India’s long history as a trading nation.

Indeed, China’s rise as a manufacturing superpower was based on its rise as both an importing and an exporting power. Even as debate continues on contemporary trade policy it is useful to recall the long history of India as a global trading power if only to underline the point that the brief era of inward-orientation, between 1958 and 1991 – both years marked by a balance of payments crisis – was an aberration in India’s long history as a trading nation.

India as a Trading Nation

“Millenniums before Columbus sailed the Atlantic and Magellan crossed the Pacific, the Indian Ocean had become an active thoroughfare of commercial and cultural traffic.”

In his rare classic India and the Indian Ocean: An Essay on the Influence of Sea Power on Indian History, historian K.M. Pannikar reminded us, “Millenniums before Columbus sailed the Atlantic and Magellan crossed the Pacific, the Indian Ocean had become an active thoroughfare of commercial and cultural traffic.” Thanks in part to its geography, given the annual and seasonal flow of winds, the sociology of the enterprising traders of Gujarat and the Coromandel coast, and the enterprise of Arab traders, the Indian Ocean was one of the early theatres of maritime trade and cultural intercourse and India was at the centre of its maritime trading activity^[2]. The Sri Vijaya Empire, based in Sumatra, dominated the eastern seaboard of the Indian Ocean well into the 10^th century. “The period of Hindu supremacy in the Ocean was one of complete freedom of trade and navigation” records Pannikar^[3]. With the decline of Hindu kingdoms in India and South-east Asia, Arab rulers and merchants gained dominance over the Indian Ocean.

“The period of Hindu supremacy in the Ocean was one of complete freedom of trade and navigation” records Pannikar.

In his masterly study of civilisation and capitalism through the 15^th to the 18^th centuries historian, Fernand Braudel draws attention to the dominant presence of India in the Indian Ocean region. ^[4]Braudel refers to the region spanning the Arabian Sea, the Bay of Bengal, the Straits of Malacca and the South China Sea – what is now referred to as the Indo-Pacific- as the “greatest of all the world economies” of the pre-industrial, pre-capitalist era.  The Far East, says Braudel, comprised of “three gigantic world-economies”: “Islam, overlooking the Indian Ocean from the Red Sea and the Persian Gulf, and controlling the endless chain of deserts stretching across Asia from Arabia to China; India, whose influence extended throughout the Indian Ocean, both east and west of Cape Comorin; and China, at once a great territorial power – striking deep into the heart of Asia – and a maritime force, controlling the seas and countries bordering the Pacific. And so it had been for many hundreds of years.”^[5]

India maintained her central position: her merchants in Gujarat and on the Malabar and Coromandel coasts prevailed for centuries against their many competitors – the Arab traders of the Red Sea, the Persian merchants of the Gulf, or the Chinese merchants.

“The relationship between these huge areas,” says Braudel, “was the result of a series of pendulum movements of greater or lesser strength, either side of the centrally positioned Indian subcontinent. The swing might benefit first the East and then the West, redistributing functions, power and political or economic advance. Through all these vicissitudes however, India maintained her central position: her merchants in Gujarat and on the Malabar and Coromandel coasts prevailed for centuries against their many competitors – the Arab traders of the Red Sea, the Persian merchants of the Gulf, or the Chinese merchants familiar with the Indonesian seas to which their junks were now regular visitors.”

If the waters around the Indian peninsula were one route for trade with the world, the deserts, forests and mountains on top, from west to east, were no barriers either. There was considerable movement of traders across the Eurasian landmass through Central Asia, Tibet and South-east Asia. A large part of India’s trade with the Eurasian landmass – right up to Europe – was by land and passed through what are now Pakistan and Afghanistan. Historian Scott C Levi has recorded the role played by “Hindu traders”, the Khatri community of what are now Pakistani and Indian Punjabs. For centuries they financed and facilitated trade between India and Central Asia and regions beyond, all the way to Europe.^[6] Historian Sanjay Subrahmanyam’s exhaustive work on trade in pre-colonial India shows the extent and range of commercial interaction India had with the world around it. To quote:  “Whereas during the years 800-1300, the main axis of long distance commercial flows in Asia appears to have been in the east-west direction (both in the caravan routes through Central Asia and on sea), the years after 1300 saw the rise of commerce largely in the north-south direction.”^[7]  The most active trading communities were from Gujarat, Andhra and Tamil regions.

A consequence of the harmful impact of British colonialism on India’s economic development was to turn India inward and shun trade with the outside world.

Asserting dominance in the waters around India in the 17^th and early 18^th centuries, European powers merely sought to take control of an existing and thriving maritime trade rather than introduce such commerce to the region. Using firepower mounted on ships European gunboats pushed away Indian and Chinese traders to establish their oligopolistic control over India’s maritime trade. Having done so, they changed the nature of India’s trading relationship with the world by making it a source of raw materials, natural resources and labour and a market for European finished goods. It is this turnaround in the structure of trade that made nationalist Indians turn against trade itself. A consequence of the harmful impact of British colonialism on India’s economic development was to turn India inward and shun trade with the outside world. In 1950, India’s share of world merchandise trade was 2.0 per cent, compared to 1.3 per cent for China. By 1990, India’s share was down to 0.5 per cent, while China had inched up to 1.8 per cent. By 2010, the relevant numbers were 1.4 and 10.4, respectively!

The neglect of foreign trade, thanks to the export-pessimism of Jawaharlal Nehru’s economic planners and policymakers, contributed to this economic disengagement with the world as well as to strategic neglect of maritime trade and security. After India’s reintegration with the world economy in 1991, the share of trade in India’s national income began rising. External trade in goods and services accounted for 16.2 per cent of India’s national income in 1950 and remained around this level till 1990. By 2010 the number was up at over 50.0 per cent, making India more trade-dependent than many OECD economies, including the United States.

This shift in India’s approach to external trade was accompanied by an equally significant shift in the direction of trade. While Western Europe and North America were India’s dominant trade partners in the 1950s and through to the 1990s, there was a directional shift after 1990. Partly as a consequence of the rise of East and South-east Asian economies in the intervening period and partly as a consequence of India’s own ‘Look East’ policy, the share of East Asian and South-east Asian economies in India’s merchandise exports increased sharply. This was matched by an equally impressive rise in the share of West Asian economies – the member countries of the Gulf Cooperation Council (GCC) in particular – in India’s import and export trade. To add to this, India’s trade with Africa, especially Southern African and East African economies as also her trade with Australian and New Zealand grew at a faster pace than her trade with the trans-Atlantic economies.

All of this has meant that more than sixty per cent of India’s external trade is now with countries that are directly linked to the Indian Ocean and the Indo-Pacific region. This is one reason India considered joining the negotiations for a Regional Comprehensive Economic Partnership agreement in Asia, and it remains a good reason why India should remain engaged in those negotiations. Whatever reservations India has with respect to RCEP have been clearly conveyed and some countries like Japan have responded positively, willing to continue the discussions and inviting India back to the negotiating table. It is in India’s interests to return to the negotiating table, making its reservations and demands clear.

Commerce is in the genes of important Indian communities.

In the long run, India should recover its share of world trade and re-emerge as a major trading nation. Commerce is in the genes of important Indian communities. Situated at the crossroads of Asia India was a natural participant in world trade and must once again re-emerge as a major trading nation.

 [1] For an understanding of the roots of protectionism in the United States see Jagdish Bhagwati & Douglas Irwin, “The Return of the Reciprocitarians: US Trade Policy Today, The World Economy, Vol. 10, 1987.

[2] K.M. Pannikar, India and the Indian Ocean: An Essay on the Influence of Sea Power on Indian History, George Allen & Unwin, London, 1945. (2^nd Edition, 1951, Page 23).  Other important studies of Indian maritime activity in the Indian Ocean region include: Ashin Das Gupta, The World of the Indian Ocean Merchant, 1500-1800, New Delhi: Oxford University Press, 2001; and Holden Furber, Sinnapah Arasaratnam & Kenneth McPherson, Maritime India, Oxford University Press, New Delhi, 2004. On the idea of the ‘underlying unity’ of the Indian Ocean region see K.N. Chaudhuri, Trade and Civilisation in the Indian Ocean: An Economic History from the Rise of Islam to 1750, Cambridge University Press, UK. 1985.  

[3] Pannikar (1951), Page 35

[4] Fernand Braudel, Civilization and Capitalism, 15^th-18^th Century: Volume II. The Wheels of Commerce, London: Fontana Press, 1985.

 [5] Fernand Braudel, Civilization and Capitalism, 15^th-18^th Century: Volume III. The Perspective of the World, Chapter 5, London: Fontana Press, 1984, pp. 484

[6] Scott C Levi, Caravans: Indian Merchants on the Silk Road, Allen Lane by Penguin, India, 2015.

[7] Sanjay Subrahmanyam, “Of Imarat and Tijarat: Asian Merchants and State Power in the Western Indian Ocean, 1400 to 1750”,  Comparative Studies in Society and History, Vol. 37, No. 4 (Oct., 1995), pp. 750-780.