Module 67. International Trade, Investment and Trade Relations

India’s international trade and investment landscape reflects its transformation from a largely inward-looking economy to a globally integrated market player. With a strong manufacturing base, growing services sector, and dynamic entrepreneurial environment, India has positioned itself as one of the world’s fastest-growing major economies. Its trade and investment policies aim to balance export-led growth, self-reliance, and global cooperation while promoting equitable development across sectors and regions.

Evolution of India’s Foreign Trade

India’s external trade structure has evolved significantly since independence. During the early post-independence decades, the country pursued an import substitution strategy, focusing on domestic industrialisation and reducing dependence on foreign goods. Imports largely comprised machinery, defence equipment, and essential commodities, while exports consisted mainly of primary products such as tea, jute, and textiles.
The turning point came with the economic reforms of 1991, when liberalisation policies opened up the economy to global competition. Trade barriers were reduced, tariffs rationalised, and the exchange rate system was made more flexible. This liberalised regime enabled India to diversify its exports, enhance competitiveness, and integrate more deeply with global value chains.
Today, India’s trade policy is guided by the Foreign Trade Policy (FTP) 2023, which focuses on promoting digital trade facilitation, expanding e-commerce exports, and simplifying procedures for small exporters.

Composition and Direction of Trade

India’s trade basket has diversified remarkably over the decades.
Major Exports include:

• Petroleum products and refined fuels
• Gems and jewellery
• Pharmaceuticals and medical equipment
• Engineering goods and machinery
• Textiles, garments, and leather goods
• Chemicals and agro-based products
• Information technology and business process services (as part of invisibles in the current account)

Major Imports include:

• Crude oil and petroleum products
• Gold and precious metals
• Electronic goods and components
• Machinery, transport equipment, and chemicals
• Fertilisers and edible oils

The services sector, especially information technology (IT) and financial services, forms a vital component of India’s invisible exports, contributing significantly to foreign exchange earnings.
In terms of trade direction, India’s partners have expanded beyond traditional markets:

• Major export destinations: United States, United Arab Emirates, Netherlands, China, Bangladesh, Singapore, and the United Kingdom.
• Major import sources: China, United Arab Emirates, United States, Saudi Arabia, Iraq, and Indonesia.

This diversification helps India reduce dependence on a few markets and enhances resilience in the face of global uncertainties.

Foreign Direct Investment (FDI) and Portfolio Investment

Investment inflows play a key role in strengthening India’s industrial base, infrastructure, and technological capabilities. The liberalisation of FDI norms, transparent regulatory frameworks, and improved ease of doing business have positioned India among the top global destinations for investment.
Foreign Direct Investment (FDI) refers to long-term investments where investors acquire a lasting interest and significant management control in an enterprise. India allows up to 100 per cent FDI in most sectors under the automatic route, except in sensitive areas such as defence, media, and insurance, where government approval is required.
Key sectors attracting FDI include:

• Services (financial, banking, insurance, outsourcing)
• Computer software and hardware
• Telecommunications
• Construction and real estate
• Automobile and electric vehicle manufacturing
• Pharmaceuticals and chemicals
• Renewable energy and infrastructure

The Department for Promotion of Industry and Internal Trade (DPIIT) monitors FDI inflows, while Invest India serves as a national investment promotion agency. According to official data, India received FDI inflows exceeding USD 70 billion annually in recent years, with major investors including Singapore, the United States, Mauritius, the Netherlands, and Japan.
Foreign Portfolio Investment (FPI), on the other hand, involves short-term capital flows into equity and debt markets. These investments contribute to liquidity and financial depth but are sensitive to global market fluctuations.

Bilateral and Multilateral Trade Relations

India’s trade relations are governed by bilateral, regional, and multilateral agreements aimed at enhancing market access, ensuring fair competition, and protecting national interests.
1. Bilateral Trade AgreementsIndia has entered into several Comprehensive Economic Cooperation Agreements (CECA) and Comprehensive Economic Partnership Agreements (CEPA) with individual countries. Notable examples include:

• India–UAE CEPA (2022): Boosts trade in goods, services, and investment flows.
• India–Japan CEPA (2011): Promotes cooperation in technology, infrastructure, and manufacturing.
• India–South Korea CEPA (2010): Facilitates trade liberalisation and joint ventures.
• India–Australia Economic Cooperation and Trade Agreement (ECTA, 2022): Expands market access for goods and services.

Negotiations are ongoing for agreements with the United Kingdom, the European Union, and Canada.
2. Regional and Multilateral EngagementsIndia actively participates in regional and global trade forums such as the World Trade Organization (WTO), South Asian Association for Regional Cooperation (SAARC), Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), and G20.
Although India opted out of the Regional Comprehensive Economic Partnership (RCEP) in 2020, citing concerns over trade imbalances and domestic industry protection, it continues to engage in alternative frameworks such as the Indo-Pacific Economic Framework (IPEF) to strengthen regional connectivity and supply chains.

Trade and Investment Promotion Initiatives

The Government of India has launched several initiatives to foster trade competitiveness and attract investment:

• Make in India: Encourages domestic and foreign investment in manufacturing.
• Atmanirbhar Bharat (Self-Reliant India): Aims to strengthen domestic production capabilities while integrating with global markets.
• National Logistics Policy (2022): Seeks to reduce logistics costs and enhance supply chain efficiency.
• Production Linked Incentive (PLI) Scheme: Offers performance-based incentives in sectors such as electronics, pharmaceuticals, and renewable energy.
• Special Economic Zones (SEZs) and Export Promotion Capital Goods (EPCG) Scheme: Provide fiscal incentives and simplified procedures to boost exports.
• Districts as Export Hubs Initiative: Focuses on developing region-specific export potential through local specialisation.

Challenges in Trade and Investment

Despite progress, India’s international trade and investment face several challenges:

• Trade Deficit: High import dependence on crude oil and electronics leads to persistent trade imbalances.
• Non-tariff Barriers: Technical standards, certification issues, and logistical bottlenecks hinder export competitiveness.
• Global Uncertainties: Geopolitical tensions, protectionism, and fluctuating commodity prices affect trade performance.
• Infrastructure and Logistics Constraints: Inadequate port capacity, transport connectivity, and warehousing facilities increase transaction costs.
• Regulatory Complexities: Multiple approvals, tax issues, and compliance requirements can deter investors.

Efforts are ongoing to address these concerns through infrastructure modernisation, trade facilitation agreements, and the digitalisation of customs and logistics systems.

Strategic and Emerging Trends

India’s trade and investment strategy increasingly emphasises sustainability, technology, and regional integration. The focus on green trade, digital economy, and supply chain resilience reflects a shift toward sustainable and future-ready growth. The expansion of e-commerce exports and start-up investments in technology-driven sectors demonstrates India’s growing role in the global innovation ecosystem.
Additionally, India’s participation in the G20 Presidency (2023) highlighted its leadership in promoting inclusive globalisation, digital trade standards, and reform of multilateral institutions. Its growing partnerships with Africa, the Middle East, and ASEAN countries also underline a diversification of trade linkages beyond traditional partners.