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The Rediff Business Special / R Gopalakrishnan

Reversal of trade surplus: four lessons for India Inc

I wish to make two points. First, that India has had an exceptionally long tradition of outward orientation in matters of trade and enterprise. Second, that the future is ours if we become even more outward looking than we have become after 1912, by understanding the true nature of competition. Let me develop these two themes.

India's outward orientation

Merchants from Harappa and Mohenjodaro were trading with Sumeria as early as 2300 BC. Around 400 BC, King Solomon imported from India, luxury items of relatively little bulk and weight. During the first century of the Christian era, there existed a brisk volume of overseas trade. Roman coins have been found in South India in such volume that it could be hypothesised that the balance of trade favoured India!

In 1948, when Vasco da Gama sailed into Calicut, it was already a thriving port familiar to Arab and Chinese merchants. In 1608, an English captain, William Hawkins, dropped anchor at Surat, armed with 25,000 pieces of gold and a letter from King James I to Mughal Emperor Jehangir. He found that Surat was a bustling city -- its indigo and cotton cloth warehouses bulged with merchandise from most of Asia, peddling everything from peacock feathers to elephants.

Ironic by the stark realities of today, it is worth mentioning Captain Hawkin's finding as he reported to King James I, "Nothing that England makes at this time is really desired by Indian merchants or officials".

Throughout the 60-odd years from 1850 to 1914 up until the War, India's foreign trade flourished. It was a great age of multi-lateral trade, an age of simple international payments and exchange rates. Major advantages came out of the rapid industrialisation of the continental countries and the United States. Japan was getting transformed under the Meiji Restoration of the 1860s after the defeat of the Tokugawa and centuries of isolation. Thus, a new level of demand was created for raw materials and foodstuffs.

The turmoil of the two Wars was reflected in the pattern of India's foreign trade, which was quite erratic. There was no growth, imports in some periods exceeded exports, and the Great Depression undoubtedly took its toll. Compared to the previous 60 years, the 1914-45 scenario had four distinguishing characteristics:

• World-wide industrial re-organisation rather than industrialisation.
• Growth of bilateral trading rather than multi-lateral trading.
• Policies of tariff protection rather than free trade.
• Foreign exchange controls and exchange rate distortions rather than gold standards.

A characteristic throughout this period from 1850-1945 was the existence of a large Indian export surplus, which was not offset by a rise in foreign exchange reserves or an increase in overseas lending. The key to this puzzle lay in invisible items in the Balance of Payments and unilateral transfer of funds to Britain. This was the genesis of the feelings about "drain of wealth" from India. But what happened after 1945?

India has consistently run a trade deficit during the last 50 years. A trade surplus situation of 100 years, probably 1000 years, suddenly got reversed. In the 1920s, our exports were about Rs 3 billion and our world ranking was fifth. In a little over three quarters of a century since then, we have squandered away a strength; today, we rank about 50th in the world trade.

Four lessons

There are four lessons.

First, that inward-looking policies extinguish natural assets and propensities.

Second, that decentralised, somewhat unsupervised growth of commerce, merchants, ports and markets is of great significance.

Third, conditions have to be created whereby it is possible to predict economic trends and reduce the zone of uncertainty.

Last, what is involved is not only creating positive elements, but also a reduction of hindrances which check economic growth.

These lessons are just as valid at the firm level as at the country level.

Now let me discuss the true nature of competition and the significance of competensity.

R Gopalakrishnan, former vice-chairman, Hindustan Lever Limited, is executive director, Tata Sons Limited. The article is extracted from his keynote address at the Bombay Graduates' Forum Seminar on July 14, 1999.

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