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Impact of India’s External Policies on Trade Performance

in Pre and Post reform Periods1

By - Dr. Ruby Ojha,


Associate Professor,
Department of Economics, PGSR,
SNDT Women’s University,
Mumbai
1. Introduction

The relationship between export expansion and economic growth is the

foundation of much of the debate on the selection of a country's development

strategy. Export-led Growth (ELG) Strategy is considered one of the main pillars

of the free trade school of thought that emerged in the 1980s. The other major

school of thought, which is known as the protectionism school and is based on

Prebisch thesis (emerged in 1950s), calls for the adoption of policies of import

substitution rather than promoting exports to stimulate economic growth. A

central task in the area of trade policy is to identify the linkages through which

trade policy promotes growth.

Key to the success of the East Asian economies was a coherent

strategy of raising the returns to private investment through a range of

policies that included credit subsidies, tax incentives, education

promotion, establishment of public enterprises, export inducements,

duty-free access to inputs and capital goods and government

coordination of investment plans (Kamal Malhotra, 2006). The causes

1
Paper is to be presented in Research Committee on “Economics, Commerce And Management Science”
at the XXXIV Indian Social Science Congress to be held from December 27-31, 2010 in Guwahati
University, Guwahati

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of the East Asian ‘miracle’ have been assessed with the general lesson

that simple, single factor explanations for such a diverse range of

experiences and successes are not helpful. Growth-promoting policies

tend to be context specific. The present paper contains a discussion on

impact of India’s external policies on trade performance and growth in pre and

post reform periods.

2. Pre-reform Period Trade Policies

Prior to 1991, India was the archetypical import substituting regime with “one of

the most complicated and protectionist regimes in the world” (IMF, 1998). This

structure of India’s foreign trade was the result of the belief of freedom fighters

that India’s colonial past marked by extensive and intensive exploitation through

the instrument of international trade was the major cause of India’s economic

underdevelopment. On the eve of independence both the composition and

direction of India’s foreign trade reflected the trend of a typical colonial and

agricultural economy. During this period India’s trade relations were confined to

Britain and other Commonwealth countries only. Composition of exports

consisted chiefly of raw material and plantation crops and while imports

composed of light consumer goods and other manufactures. Thus, international

trade was viewed as a ‘whirlpool of economic imperialism’.

Therefore, after independence planners viewed foreign trade and investment with

suspicion and turned towards “inward” oriented policies. They heavily relied upon

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large scale import substitution through protection of domestic industries, direct

control on import and foreign investment and overvalued exchange rate. The

scene towards exports was also extremely pessimistic.

a. Import Policy: Import controls in India were first imposed in May

1940. The controls were first imposed on consumer goods and were gradually

extended to practically cover all the imports by January 1942. The main aim of

this policy was to conserve scarce foreign exchange. Imports from Sterling area

were mainly regulated due to shipping availability considerations because most

of the shipping facilities were diverted for war purpose. In the post war years,

extensive liberalization in import control policy took place through widening the

scope of Open General License (OGL) in 1945-46. But, the import restrictions

were again imposed in 1947 on the entire world including the Sterling area, with

the objective of conserving the scarce foreign exchange because India’s Balance

of Payment had turned adverse. This was the beginning of the “quantitative”

restrictions era because import licenses were given on the basis of specific

exchange ceiling allotted for specific commodities and groups, designated by

currency areas (Bhagwati and Desai, 1970).

In the post-independence period two pillars of government of India’s import

policies were i) import restriction and ii) import substitution. This policy was

largely based on the Imports and Exports (Control) Act of 1947and the Import

Trade Control Order of 1955. During the First Five Year Plan the approach

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towards imports was generally one of “Progressive” liberalization throughout,

especially towards the end, to meet the demand for imported goods created after

the World War II. This approach was also supported by the devaluation of rupee

in September 1949. In second half of 1954, substantial changes in tariff structure

through the India Tariff (Second Amendment) Act, 1954 were made to reduce

reliance on import control system. But the progressively liberal measures and the

changed tariff policies came to a halt as a result of the exchange crisis in the

beginning of the second Five Year Plan, when for encouraging large scale

industrialization government had to import capital goods in large quantities. As a

result, substantial foreign exchange expenditure was there against continuously

stagnant export earnings and India precipitated a balance of payment crisis in

1957. This is clear from Table – 1 which shows that during 1950s percentage of

imports to GDP was 6.89. To fight this crisis, tariff levels were increased and

quantitative restrictions were made more severe. This development strategy

insulated India from the world economy (Uma Kapila, 2008-09, p. 555) and

percentage of imports to GDP fell down to 5.62 % during 1960s as shown in

Table – 1.

Table – 1

Decadal Average of GDP and Imports During the Plan Period

(Rs. Crore)

Years GDP (at Imports % of


current Imports to
prices) GDP
1950-51 to 11653.7 802.7 6.89
1959-60
1960-61 to 26470.3 1490.1 5.62

4
1969-70
1970-71 to 73798.8 4511.3 6.11
1979-80
1980-81 to 255838.3 19897.6 7.77
1989-90
1990-91 to 1053204.6 112683.8 10.70
1999-2000
2000-01 to 2862547.25 518334.88 18.11
2007-08

Source: various issues of Economic Survey, Government of India.

Import restriction, commonly known as protection, was essential in the beginning

because developed countries were producing and selling every commodity at low

prices. In such a situation, India could not develop any industry without protecting

it from foreign competition. For industrial development of the country, it was felt

necessary by the planners to control foreign competition through import licensing,

import quotas, import duties and banning import of goods in certain cases. As a

result, percentage of imports to GDP could not improve much in 1970s also and

remained at 6.11 as per Table - 1. The import control policies were pursued for

almost two decades till 1977-78 barring a brief period of import liberalization after

the devaluation of rupee in June 1966. This import liberalization was granted to

59 priority industries like – export industries, capital building industries, sugar,

cotton, textile, fertilizer, seeds pesticides etc. for implementing the new

agricultural strategy initiated during 1966.

The two broad objectives of the programme of import-substitution in India were:

a) to save scarce foreign exchange for the import of more important goods, and

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b) to achieve self-reliance in the production of as many goods as possible. In the

earlier phase of the import substitution policy, consumer goods were produced

domestically. In the second phase, emphasis was on production of capital goods

and in the last phase encouragement to indigenous techniques was given in

order to reduce dependence on imported technology. A complex administrative

mechanism was set-up to implement such policies in a rigorous manner.

As noted by Bhagwati and Desai (1970, pp - 308), the import control system

worked on: (i) incomplete and unsystematic information; and (ii) a series of ad

hoc, administrative rules of thumb operated by a time-consuming bureaucracy.

Further, whatever limited allocational aims it may have had were frustrated, in

varying degrees, by the corruption that inevitably arose from the large premia on

imports under the control system.

The year 1977-78 initiated a new era of import liberalization in the country and

the process continued during 1980s. This resulted in an increase in percentage

import to GDP during 1980s to 7.77 as shown in Table – 1. The approach of

annual import policies of the country of 1980-81 to 1984-85 was quite liberal

because industrial sector needed imported inputs for its growth. Further boost to

this liberal approach was given in the subsequent three long term policies which

covered the periods of 1985-88, 1988-90 and 1990-92. During this period a large

number of capital goods, raw material components and consumables were

placed under “Open General License” (OGL) category which means that they

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could be imported without any import license. During 1980s the policy of import

liberalization was pursued vigorously which resulted in substantial increase in

volume of imports during this period. The import policy in 1980s was also given

‘export-orientation’ for increasing export earnings of the country. For making the

exports competitive in the world market, some special facilities were provided to

the exporters. Duty free imports of raw materials against Registered Exporters

Policy (REP) licenses were introduced. Facility was also provided for the import

of second hand capital goods. On the basis of fulfilling certain basic requirements

for specified period of time, exporters were granted the status of Export Houses,

Trading Houses, Star Trading Houses and super star Trading Houses. Since

these exporters were earning needed foreign exchange for the country, they

were provided with a number of import benefits.

Since the rigid import control policy had many adverse economic effects like

delays, inflexibility, creation of excess capacity, loss of revenue and black

marketing in import licenses, it promoted import substitution but at high

production cost domestically. Protection was given to all import substituting

industries regardless of high production cost low efficiency and comparative

advantage. G.M. Meier argues that import substitution strategy was not targeted

according to systematic economic criteria but instead was pursued in a chaotic,

inefficient manner and for too long a time. At the micro level too many plants

produced too small an output, quality was inferior, capital was underutilized and

the industrial structure became increasingly monopolistic or oligopolistic…

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Although the sheltered firms’ profits in local currency could be high, the domestic

resource cost was excessive, and the cost increased per unit of foreign

exchange saved. Given high effective rates of protection, the domestic value

added in some cases was actually negative at world prices… Further, policy

induced price distortions – negative real rates of interest, excessively high wages

for unskilled labour and undervalued foreign exchange were pervasive (Meier,

1990).

b. Export Policy: Until the crisis of 1991, India’s trade policy was based

on three main objectives (Marjit and Chaudhuri, 1997): i) preservation of

employment in the import competing sectors; ii) raising revenue through trade

restrictions; and iii) promoting self-reliant industrialisation. Bhagwati and

Srinivasan’s (1993) study shows that exports were not given adequate attention

until the early 90s, when the foreign exchange reserves were at an all-time low.

Exports were, in fact, discouraged due to the pro-import competing policies.

According to Bimal Jalan, the export policy of the government of India in the pre-

reform period can be divided into three phases:

Phase I (Up to first oil shock of 1973)

This phase was known by export pessimism. As per Prebisch, Singer and Nurkse

thesis, it was believed that international trade does not benefit the developing

countries because terms of trade between the developed and the developing

countries always remain in favour of the developed countries. This was a crucial

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assumption as it firmly established a case for discouragement of exports and for

policies which encouraged production for the domestic market (Jalan, 1992). As

a result, exports were largely neglected during the First and the Second Five

Year Plans, which was justified on the ground that demand for Indian exports

was inelastic (Veeramani, 2007). Stagnation of India’s export in two decades

from independence is shown in table – 2. It was 5.17% of GDP in 1950s and was

reduced to 3.60%during 1960s.

Table – 2

Decadal Average of GDP and Exports During the Plan Period

(Rs. Crore)

Years GDP (at Exports % of


current Exports to
prices) GDP
1950-51 to 11653.7 602.0 5.17
1959-60
1960-61 to 26470.3 953.3 3.60
1969-70
1970-71 to 73798.8 3769.6 5.10
1979-80
1980-81 to 255838.3 13174.6 5.14
1989-90
1990-91 to 1053204.6 93729.0 8.89
1999-2000
2000-01 to 2862547.25 377561.75 13.18
2007-08
Source: various issues of Economic Survey, Government of India.

The pertinent question therefore, is whether the undoubted stagnation in India’s

export earnings during these decades, was beyond India’s control, to be

attributed to ‘demand conditions’, or whether domestic Indian policies contributed

to this phenomenon (Bhagwati and Desai, 1970, pp. 378). After analyzing the

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case commodity by commodity, Bhagwati and Desai (1970, pp. 394) arrived at

the conclusion that except for a limited number of bright spots, … the decade

1951-60 reveals a stagnation of export earnings whose proximate causes are to

be found, for the most part, in domestic policies within India. Year wise data for

world exports, India’s exports and percentage of India’s exports in world exports

is shown in Table 3. The table shows that India’s export as percentage to world

exports kept declining from 2.5 in 1947 to 0.9 in 1966.

Table – 3

India’s Exports and Share of Total Value of World Exports, 1947-66

Calendar Year World Exports Indian Exports India Exports as %

(U.S. $ million) (U.S. $ million) of World Exports


1947 48549 1234 2.5
1948 54058 1371 2.5
1949 55102 1288 2.3
1950 57110 1146 2.0
1951 77140 1611 2.1
1952 74170 1295 1.7
1953 74930 1116 1.5
1954 77670 1182 1.5
1955 84550 1276 1.5
1956 93880 1300 1.4
1957 100880 1379 1.4
1958 96180 1221 1.3
1959 101780 1304 1.3
1960 113200 1333 1.2
1961 118700 1396 1.2
1962 124700 1403 1.1
1963 136000 1631 1.2
1964 152600 1749 1.1
1965 165500 1686 1.0
1966 181300 1606 0.9
Source: 1947-49-International Financial Statistics (IFS), Feb. 1952 (International

Monetary Funs), pp. xvii-xviii, 1950-60-IFS, May 1961, pp. 36, 38, 1961- IFS,

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Dec. 1962, pp. 38, 40, 1962-66-IFS, Oct. 1967 (IMF), pp. 34, 36,

The table is taken from Bhagwati and Desai, India: Planning for

industrialization, Oxford University Press, 1970, pp. 370

In order to see the impact of domestic policy change on export growth it is

important to consider the external factors as well that determine the export

growth. The most crucial external factor in this regard is the growth of world

demand (world export is considered as a proxy to world demand). A country may

fail to exploit the buoyancy of world demand if the domestic policy environment is

highly restrictive. Similarly, despite the policy reforms, a country’s exports may

not grow faster if world demand happens to decelerate (Veeramani, 2007).

Keeping these factors in view, the trend of world export and Indian export can be

analyzed on the basis of Table - 4 in pre and post reform periods.

Table – 4

Indicators of India’s Export Growth, 1950-2005 (US $ Million)

Period Average Annual Growth Rates India’s Share in India’s Exports

World Exports, of Goods and

Services (% of
(Average)
Goods Services Goods Services GDP) Averages
India World India World
1950-59 0.22 6.30 3.78 NA 1.39 NA NA
1960-69 3.58 8.77 1.78 NA 0.90 NA 4.21
1970-79 17.97 20.41 26.61 NA 0.54 NA 5.20
1980-85 2.39 -0.86 3.79 0.36 0.47 0.81 6.05
1986-90 17.76 12.36 10.47 14.14 0.48 0.63 6.29
1993-97 13.30 10.56 14.10 9.22 0.60 0.59 10.50
1999-01 10.26 4.09 9.52 3.07 0.66 1.07 12.52
2002-05 25.29 17.58 45.36 15.16 0.81 1.64 17.19
Source: Veeramani, C., “Sources of India’s Export Growth in Pre- and Post-Reform

11
Periods”, Economic and Political Weekly, Mumbai, June 23, 2007, pp-2420

On the basis of tables 3 and 4, it can be clearly concluded that the country failed

to make the best use of the trade possibilities available during 1950s and 1960s.

Table - 4 reveals that when world goods trade was growing at 6.3 percent per

annum during 1950s, the exports of goods from India stagnated at 0.22 percent

per annum. When the world merchandise exports grew at relatively faster rate

i.e, at 8.8 percent per annum during 1960s, the growth rate of India’s

merchandise exports improved to 3.6 percent per annum. The share of India’s

exports in world exports declined sharply from 1.4 percent during 1950s to 0.9

percent during 1960s. This may be the detrimental effects of the overvalued

exchange rate and other government policies on exports (Veeramani, 2007).

As per Table – 4 the average export performance during the Third Plan appears

to have picked up significantly above the average Second Plan performance, not

merely in value but in volume as well, even though, as a percentage of world

trade, there was no improvement and, if anything, some deterioration. There are

essentially two major explanations of the improvement in India’s export

performance during the Third Plan. These are:

(i) The first factor was the major improvement in exports to the Soviet-

bloc countries, beginning around 1960-61.

(ii) The second factor behind the improvement in export performance was

a shift towards export subsidization on a major scale.

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The export subsidy actually increased through the third Plan. Before that the

scale was never large enough to merit description as a programme. In 1966,

export subsidy was introduced for some non-traditional goods and by 1967 bulk

of engineering goods, chemicals, sports goods, paper products, steel scrap,

prime iron and steel, cotton textile and some other products was also covered

(Bhagwati and Desai also,1970, pp. 396).

Thus, the policy of export promotion generally adopted during the third Plan

period, ending in the devaluation of June 6, 1966, can best be described as

having ultimately become one of indiscriminate export promotion, with even a

perverse bias towards fixing the subsidy inversely to the competitive strength of

the exportable commodity. This system had its counterpart in the indiscriminate

protection that import policy furnished to domestic industries (Bhagwati and

Desai, 1970, pp. 466).

On the basis of the results of growth decomposition exercise by Veeramani

(2007), where he has worked out World Trade Effect, Commodity Composition

Effect, Market Distribution effect and Competitiveness Effect, pertaining to India’s

merchandise exports during the pre and post reform periods, he has concluded

that during 1962-70 the actual export growth was below the potential by 278

percent. The failure to exploit this opportunity is mainly attributed to negative

competitiveness effect (due to overvalued exchange rate and general bias of the

policy regime against exports) followed by negative commodity composition

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effect which means that during this period India has been specializing in the

“wrong” commodities.

Up to the Third Five Year Plan, passive export policy was followed in India. As a

result, except for a few items fall in share of India’s traditional export were seen

and there was insufficient expansion in non-traditional exports. After the

devaluation of Indian rupee by 365 % in terms of gold in 1966, it was thought that

the export earnings will increase and import expenditure will decline and it will

favourably affect India’s Balance of Payments situation. But, devaluation failed to

increase export earnings. Consequently, the scheme of export subsidy was

introduced which was avoided earlier.

Phase II (1973-1983)

Table – 4 Shows that during 1970s, world export, which is considered as a proxy

to world demand, registered a hefty growth rate of 20.4 percent per annum.

Buoyancy of world demand and a relatively favourable domestic policy provided

an atmosphere conducive to a rapid growth of exports from India (Veeramani,

2007). Table – 2 indicates that India’s export percentage to GDP increased 5.10

in 1970s. In Table 4 we can see that India’s merchandise and services exports

grew at the annual rate of about 18 percent and 27 percent respectively during

the 1970s. Table 4 also reveals that despite the high growth, India’s share in

world merchandise exports declined to 0.5 percent per annum during the 1970s

from 0.9 percent per annum during the 1960s.

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During this one decade’s time export promotion policies were introduced

because import substitution policies alone could not make Balance of Payment

situation viable. Nominal Effective Exchange Rate (NEER) of the rupee

depreciated continuously during 1970s. Given the lower rate of inflation at home

as compared to the outside world, there was a sharp downward movement in the

Real Effective Exchange Rate (REER) of rupee and relative profitability of export

increased (Nayyar, 1987). Besides, some favourable external factors also

supported the export promotion policies. These factors (Nayyar, 1987) are: i)

there was remarkable expansion in world trade which was associated with an

increase in world import demand for most of India’s exportables. ii) There was a

boom in the prices of primary commodities, which led to a sharp increase in

average unit values realized for exports. iii) The oil price increases led to the

emergence of new markets in the oil exporting countries which constituted a net

addition. As a result exports grew considerably. Still profitability in heavily

protected domestic market remained significantly higher than that in export

market (Kathuria, 1966, as quoted in Veeramani, 2007).

The results of Veeramani’s growth decomposition exercise for this period reveals

that as compared to 1960s, the export performance during 1970s was better

because the gap between the actual exports and the potential declined to 135

percent for 1970-80 from 278 percent of 1962-70. The competitiveness and the

commodity composition effects were still negative though the values were much

15
lower than that of the earlier period. This means that real exchange rate

depreciation and other export promotion measures of the 1970s were not

sufficient to fully exploit the potential offered by the buoyant world economy

(Veeramani, 2007).

Phase III (1983 onwards)

The policy changes in eighties have been influenced by the recommendations of

a number of committee which were set-up during seventies and eighties. The two

prominent committee reports may be mentioned i.e., ‘The Report of the

Committee on Import Export Policies and Procedures” under the chairmanship of

P.C. Alexander, 1978 and the “Committee on trade Policies” under the

chairmanship of Abid Hussain, 1984. The Alexander Committee recommended

simplification of the import licensing procedure and provided a framework

involving a shift in the emphasis from ‘controls’ to ‘development’. As a result,

import of capital goods and certain raw materials which were not available

indigenously, were liberalized in late seventies and these items were put under

the Open General License (OGL) list. During this period efforts were made to

simplify the foreign trade procedures and special measures were initiated to

boost the export of project goods. The Abid Hussain Committee envisaged

‘growth-led export’ rather than ‘export-led growth’ and stressed upon the need for

harmonization of foreign trade policies with other economic policies. The

16
committee favoured announcement of trade policies for longer periods (Uma

Kapila, 2008-09, P. 556).

Export policy in phase III emphasized technological up gradation, increase in size

of plants, liberalized imports and domestic and international competition for the

entire industrial sector, which was essential for export promotion (Nayyar, 1987).

Thus, in this period government’s approach was more positive to export

promotion strategy. Many incentives were given by the government for

enhancement of export promotion.

In 1966, Cash Compensatory Support was introduced to provide compensation

for unrebated indirect taxes paid by exporters on inputs, higher freight rates and

market development cost. This support was abolished after substantial trade

liberalization and devaluation of rupee in July 1991. Duty Drawback System was

established to reimburse exporters for tariff paid on the imported materials and

intermediates and central excise duties paid on domestically produced inputs

which enter into export production. In 1957 under the Import Entitlement

Scheme, exporters were helped in procuring imported raw material and other

components necessary for export production. The procedure of granting import

licenses under this scheme was withdrawn after devaluation of Indian rupee in

1966 but was soon reintroduced as new name called Import Replenishment

Scheme. The scheme of 100% Export Oriented Units was introduced in

December 1980 to provide free trade environment to export production for

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increasing competitiveness of Indian exports in World market. Besides, various

subsidies and fiscal concessions were provided for promoting exports and

making it competitive in international market.

For implementing these schemes and provisions a number of councils and

organizations were set up. These include – i) Export Promotion Councils, ii)

Commodity Boards, iii) Agricultural and Processed Food Products Exports

Development Authority, iv) Export Houses, v) The Central Advisory Council on

Trade, vi) The Federation of Indian Export Organizations, vii) The Trade

Development Authority, viii) Export Credit and Guarantee Corporation of India, ix)

The Export Inspection council, x) Trade Fair Authority of India etc. The main

objectives of these organizations are to develop and promote exports and up

gradation of technology through the medium of fairs to be held in India and

abroad.

The export boom of the 1970s, however, could not be maintained during the first

half of the 1980s. Table – 2 indicates that percentage of exports to GDP in India

increased marginally only over the previous decade. In 1970s it was 5.10 percent

and increased to 5.14 percent during 1980s. As per Table - 4, the growth rate of

world exports turned negative in this period as a result of the second oil price

hike and India’s exports also decelerated sharply. Though, during the second half

of the 1980s, the world economy recovered and India’s exports also grew at

17.76 percent per annum (Table – 4). According to Joshi and Little (1994), there

18
was a genuine improvement in export competitiveness of India during this period

due to a major depreciation of the Real Effective Exchange Rate (REER) and

increased exports subsidies. According to them, exchange rate is the most

important determinant of Indian competitiveness. Table – 5 also reveals that

during 1980s World exports and Indian exports both fell sharply over the previous

time periods.

Table – 5

India’s Share in World Exports

(US $ million)

Year World India India’s Change over the


Share in Previous Period (%)
World World India

Exports
(%)
1970 313804 2031 0.6 -- --
1975 876094 4665 0.5 179.19 129.69
1980 1997686 8486 0.4 128.02 81.91
1985 1930849 8904 0.5 -3.35 04.93
1990 3303563 18143 0.5 71.09 103.76
2000 6254511 41543 0.7 89.33 128.98
2005 10306710 103404 1.0 64.79 148.91
2006 11887549 126126 1.1 15.34 21.97

Source: Economic Survey, 2008-09, Government of India, Tables A-100 to

A103.

As per the results of Veeramani’s growth decomposition exercise, for the first

time actual exports were higher than the potential offered by the growth of world

19
demand during 1980-86. This can be attributed to positive competitiveness and

commodity composition effects and favourable market distribution effect. The

later part of the decade witnessed marginal decline in the whole situation in spite

of a sharp depreciation of the REER.

3. Post - reform Trade Policy

External payment crisis in terms of increased current account deficit, increased

debt-service payments, low foreign exchange reserves, high levels of short-term

debts, soaring inflation during 1990-91 in addition to the collapse of Soviet Union

and spectacular growth of China after 1978 reforms, provided the immediate

impetus for change in economic policy regime. The trade policy reforms really

proceeded on three lines; first, to drastically reduce the taxes and subsidies on

exports and imports; second, to relax the quantitative restrictions on imports and

exports; and third, adjustment of exchange rates (Marjit S. and Raychaudhuri A.,

1997). The focus of the export policy, by and large, shifted from product specific

incentives to more generalized incentives based primarily on the exchange rate

(Veeramani, 2007). A major objective of the economic reforms introduced in

1991, has been to reduce and eventually eliminate the gap between domestic

and export profitability.

Thus, though the process of trade liberalization in India was initiated during

seventies but the trade policy measures initiated after 1991 have been more

comprehensive. Following the India’s commitment to the WTO, in the post-reform

20
period, all the quantitative restrictions on imports were withdrawn by 2001-02 and

the import duties were also rationalized as per the Chelliah Committee

recommendations. The peak import duty on non-agricultural items is now only

10%. A large number of exports and imports which used to be canalized through

public-sector agencies in India are decanalized after the reforms. The Exim

Policy 2001-02 puts only 6 items under special list which are to be allowed only

through state trading agencies. These items are: rice, wheat, maize, petrol,

diesel and urea. As a result, imports as a percentage of GDP in India increased

to 10.70 (Table – 1).

In July 1991, downward adjustment in the exchange rate of the rupee was made

against the major currencies. It was held that a more realistic exchange rate

would make exporting more attractive (Veeramani, 2007). Since March 1993, the

exchange rate of the rupee is market determined. The objective of the exchange

rate management has been to ensure that the external value of rupee is realistic

and credible. There is no excess volatility, no de-stabilizing speculative activity,

there is adequate development of resources and the foreign exchange market

develops in orderly manner. This helped in increasing the exports as percentage

of GDP to 8.89.

For the purpose of promoting exports in the post-reform period, government

permitted the setting up of trading houses with 51% foreign equity. In the year

2000, a scheme for setting up Special Economic Zones (SEZs) was announced

21
to promote exports. The Export-Oriented Units (EOUs) scheme introduced in

early 1981 is complementary to the SEZ scheme. The Exim Policy 2001 also

introduced the concept of Agri Export zones (AEZs) to give promotion to

agricultural exports.

Market Access Initiative Scheme was launched in 2001-02 for undertaking

marketing promotion efforts abroad. The amended export-import policy 2002-07

specifically emphasized service exports as an engine of growth and announced a

number of measures for promotion of exports of services. A large number of tax

benefits and exemptions have been granted during the 1990s to liberalise

imports and promote exports especially for Information Technology sector, the

telecommunication sector and the entertainment industry. The focus of all these

reforms has been on liberalization, openness, transparency and globalization

with a basic thrust on outward orientation focusing on export promotion activity

and improving competitiveness of Indian industry to meet global market

requirements.

These comprehensive and systemic economic reforms were introduced after the

balance of payment crisis in 1991 with the hope that the policy changes would

boost exports. As per Table - 4, during 1993-97, India’s merchandise exports

recorded a growth rate of about 13 percent per annum and service exports grew

at a comparable growth rate of about 14 percent per annum. As a result of the

slow down in world demand due to the crisis in East Asia Merchandise and

22
service exports of India and that of the world declined in absolute value after1998

from the level in the previous year (Table - 4). India’s exports recovered slowly

during 1999-2001 by growing at about 10 percent per annum in case of both

goods and services. After full recovery of the world economy from the Asian

crisis, India’s merchandise and service exports grew at a rate of about 25 percent

and 45 percent per annum respectively during 2002-05 despite the appreciation

of REER by about 1 percent per annum during the same period. In sum, India’s

exports during the post-reform period have been growing faster than the rate of

growth of world exports. Similar results we can see in tables 2 and 5 though with

the help of different sets of data. Table – 2 indicates that the percentage of

India’s export to GDP increased to 8.89 in 1990 as compared to 5.14 during

1980s. Table – 5 also shows that India’s share in world exports increased to

0.7% in 1990s from 0.5% in the previous decade and 1.0 % in 2005. According to

the results of Veeramani’s (2007) growth decomposition exercise during 1993-

2005 the actual growth rates of India’s merchandise and service exports have

been above the potential offered by the growth of world trade mainly due to

positive competitiveness effect. Share of India’s export in total world export also

increased to 1 percent in 2005 and 1.1 percent in 2006.

4. Foreign Trade Policy – 2004-09

The policy aimed at increasing India’s share in world exports to 1.5 % by 2009.

Sectors with significant export prospects coupled with potential for employment

generation in semi-urban and rural areas were identified as thrust sectors.

23
Foreign Trade Policy has announced specific strategies termed as Special Focus

Initiative for five such sectors i.e, agriculture, handicrafts, handlooms, gems and

jewellery and leather and footwear. Presently services contributed more than

50% of the country’s GDP. To provide thrust to service exports “Served from

India” is to be built as a brand.

The exporters who exceed the annual export target were to be rewarded under

the “Target plus Scheme”. This reward was in terms of entitlement to duty free

credit based on incremental export earnings. The Foreign Trade Policy (FTP)

introduced a new scheme to establish free trade and warehousing zones

(FTWZs) to create trade related infrastructure to facilitate the import and export

of goods and services with freedom to carry out trade transactions in free

economy. A number of benefits for the export-oriented units were provided.

Focus of foreign Trade Policy is on infrastructure development, reducing

transactional cost, simplifying procedures etc.

Since then, the number of steps that we have taken through stimulus packages

and through the FTP has started yielding fruits. In January 2010, exports were

$14.36 billion compared to $12.86 billion in January 2009 on a month-on-month

basis, which is up by 11.5 per cent. But, the critics of this policy have highlighted

the following issues:

1. Various export promotion schemes have resulted in a substantial loss of

revenue to the government.

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2. The target plus scheme could lead to a sharp rise in circular trading in the

guise of increasing exports. There was a substantial revenue leakage in

this scheme.

3. Foreign Trade Policy allowed the import of second hand machinery

without any age limit. Import of such machines can become a burden on

the economy is not likely to help export.

4. This policy fails to take a holistic view of trade issues.

5. Foreign Trade Policy – 2009-14

In the Foreign Trade Policy 2009-14 higher support has been given for market

and product diversification. Incentive schemes have been expanded by way of

addition of new products and markets. With the country's export destinations

limited to the US and Europe, which were the first to get affected in the recent

global financial meltdown, India saw its trading opportunities buffeted by this

adverse turn of circumstances. In order to soften the harsh impact of such over-

dependence on limited destinations, the Foreign Trade Policy (FTP) stressed on

both market as well as product diversifications in a bid to cash in on the next

wave of growth centres in Asia, Latin America, Africa and Oceania. 26 new

markets have been added under Focus Market Scheme. The incentive available

under Focus Market Scheme (FMS) has been raised from 2.5% to 3% and

incentive available under Focus Product Scheme (FPS) has been raised from

1.25% to 2%. Focus Product Scheme benefit extended for export of ‘green

products’; and for exports of some products originating from the North East. A

25
large number of products from various sectors have been included for benefits

under Focus Product Scheme. Market Linked Focus Product Scheme (MLFPS)

has been greatly expanded. Under this scheme, benefits to the selected products

will be provided, if exports are made to 13 identified markets (Algeria, Egypt,

Kenya, Nigeria, South Africa, Tanzania, Brazil, Mexico, Ukraine, Vietnam,

Cambodia, Australia and New Zealand). Besides, higher allocation for Market

Development Assistance (MDA) and Market Access Initiative (MAI) schemes is

being provided.

To aid technological upgradation of the export sector, Export Promotion Capital

Goods (EPCG) Scheme at Zero Duty has been introduced. This Scheme will be

available for engineering & electronic products, basic chemicals &

pharmaceuticals, apparels & textiles, plastics, handicrafts, chemicals & allied

products and leather & leather products (subject to exclusions of current

beneficiaries under Technological Upgradation Fund Schemes (TUFS),

administered by Ministry of Textiles and beneficiaries of Status Holder Incentive

Scheme in that particular year).

Jaipur, Srinagar and Anantnag have been recognised as ‘Towns of Export

Excellence’ for handicrafts; Kanpur, Dewas and Ambur have been recognised as

‘Towns of Export Excellence’ for leather products; and Malihabad for horticultural

products. To increase the life of existing plant and machinery, export obligation

on import of spares, moulds etc. under EPCG Scheme has been reduced to 50%

of the normal specific export obligation.

26
Additional flexibility under Target plus Scheme (TPS) /Duty Free Certificate of

Entitlement (DFCE) Scheme for Status Holders has been given to Marine sector

in order to provide a fillip to the marine sector which has been affected by the

present downturn in exports.

To promote export of Gems & Jewellery products, the value limits of personal

carriage have been increased from US$ 2 million to US$ 5 million in case of

participation in overseas exhibitions. The limit in case of personal carriage, as

samples, for export promotion tours, has also been increased from US$ 0.1

million to US$ 1 million. In an endeavour to make India a diamond international

trading hub, it is planned to establish "Diamond Bourse(s)". A new facility to allow

import on consignment basis of cut & polished diamonds for the purpose of

grading/certification purposes has been introduced.

To reduce transaction and handling costs, a single window system to facilitate

export of perishable agricultural produce has been introduced. Leather sector

shall be allowed re-export of unsold imported raw hides and skins and semi

finished leather from public bonded ware houses, subject to payment of 50% of

the applicable export duty. Minimum value addition under advance authorization

scheme for export of tea has been reduced from the existing 100% to 50%. DTA

sale limit of instant tea by Export Oriented Units (EOUs) has been increased from

the existing 30% to 50%. Pharma sector extensively covered under Market

Linked Focus Product Scheme (MLFPS) for countries in Africa and Latin

America; some countries in Oceania and Far East. To simplify claims under FPS,

27
requirement of ‘Handloom Mark’ for availing benefits under FPS has been

removed.

EOUs have been allowed to sell products manufactured by them in Domestic

Tariff Ares (DTA) upto a limit of 90% instead of existing 75%, without changing

the criteria of ‘similar goods’, within the overall entitlement of 50% for DTA sale.

EOUs will now be allowed to procure finished goods for consolidation along with

their manufactured goods, subject to certain safeguards. During this period of

downturn, Board of Approvals (BOA) have been established to consider,

extension of block period by one year for calculation of Net Foreign Exchange

earning of EOUs. EOUs will now be allowed CENVAT Credit facility for the

component of Single Administrative Document (SAD) and Education Cess on

DTA sale.

To encourage Value Added Manufactured export, a minimum 15% value addition

on imported inputs under Advance Authorization Scheme has now been

prescribed. A large number of Project Exports and manufactured goods are

covered under FPS and MLFPS.

Overall procedures have been simplified and various efforts are made to reduce

the Transaction Costs. An Inter Ministerial Committee is to be formed to

redress/resolve problems/issues of exporters. To enable support to Indian

industry and exporters, especially the MSMEs, in availing their rights through

trade remedy instruments, a Directorate of Trade Remedy Measures shall be set

up.

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6. Evaluation

The trade policy reforms initiated in 1991 have drastically changed the foreign

trade sector scenario and have resulted in the shift from inward-oriented policies

to and outward-oriented Policy. According to Deepak Nayyar, in large countries

like India, where the domestic market is overwhelmingly important, sustained

industrialization can only be based on the growth of the internal market. The vital

fact that the macroeconomic inter connections between the foreign trade sector

and the overall process of planning for industrialization are crucial. The solution

to the problems of the national economy cannot be found through the foreign

trade sector on the simple recipes associated with that. On the other hand, the

problems of the foreign trade sector can be resolved to a considerable extent

through an improved performance and a better management of the economy at

home. In other words, the tail cannot wag the dog”. (Nayyar quoted in Mishra and

Puri, Indian Economy, 2008, PP. 498)

Overall, it may be fair to say that openness, by leading to lower prices, better

information and newer technologies, has a useful role to play in promoting

growth. But it must be accompanied by appropriate complementary policies

(most notably, education, infrastructure, financial and macroeconomic policies) to

yield strong growth results. The precise mix of trade and other policies that is

needed will strongly depend on the specific circumstances of each country. It is

therefore important to focus on the detailed pathways through which trade

29
liberalization in each country has an impact on poverty (McCulloch, Winters and

Cirera, 2001).

Clearly, the key to deal with the present economic crisis is to increase demand

domestically, as we have no control on the demand in other countries which are

facing a far worse situation than we do. This is precisely why Indian exports have

been suffering a big blow as the US, UK the European countries and Japan,

which account for more than half of India’s exports, are in the grip of a recession.

Table – 6 gives percentage change in real GDP of countries which are India’s

main trading partners. The results of a study “The Impact of Global Slowdown on

India’s Exports and Employment” by UNCTAD India team (May, 2009) show that

India’s exports to world are very responsive to income changes. A 1% decline in

GDP growth of world will lead to 1.88% decline in India’s growth of exports to

world. In the light of this finding the downside indicated by the provisional data of

2009 and 2010 in Table – 6 is that we may have to wait longer than expected in

the export sector until these economies revive.

Table – 6

Snapshot of the World Economy

Real GDP (% change)

Countries / 2006 2007 2008 2009P 2010P


Year
United 2.80 2.00 1.10 -4.00 0.00
States
Euro area 3.00 2.60 0.70 -4.10 -0.30
Canada 3.10 2.70 0.50 -3.00 0.30
United 2.80 3.00 0.70 -3.70 -0.20

30
Kingdom
Japan 2.00 2.40 -0.60 -6.60 -0.50
India 9.70 9.00 6.00 4.30 5.80
China 11.60 13.09 9.00 6.30 8.50

Source: World Bank

Indeed, large Asian developing countries (LADCs) – China, India, but also

Indonesia, Vietnam and, to a lesser extent, the Philippines – with the total

population of around 2.7 billion people, have been maintaining positive growth

rates all through the period of the global downturn, and are accelerating as the

latter comes to its end. They made it because their domestic demand - not only

investment, but also private consumption, offset the negative influence of a

dramatic exports plunge. In the first half of 2009, retail sales in China rose 14.7

per cent and in Vietnam about 20 per cent year-on-year. In India, in the

organised sector, their quarterly growth in the July-September period was 20 per

cent against 5 per cent in April-June. In Indonesia, private consumption grew

year-on-year 6.0 per cent in the first and 4.8 per cent in the second quarter. In

the Philippines, its growth (1.6 per cent for the first six months of 2009) is slower,

but still positive. Without a doubt, the rise of private consumption in the LADCs is

a key long-term trend and there is a lot of room for further expansion. Emerging

Asia is shaping up as the main driver of growth in the coming year

Deutsche Bank Research of July 2009 says economic growth in the developed

economies will likely be anaemic for several years to come. By contrast, the

downturn in the Emerging Markets (EMs) (Brazil, China, India, Korea, Mexico,

31
Russia) will be short-lived by comparison, and a rapid return to sustained growth

in many EMs is likely by 2011. The study further elaborates that the EM-6 have

been (or will be) able to engineer a more or less rapid recovery by boosting

domestic demand.

It is time now for a new development policy agenda that focuses on domestic

demand-led growth. Achieving such an outcome will require a new constellation

of policies aimed at raising the growth rate of output and real income in

agriculture to expand the domestic market for industrial goods. In the words of

Blecker: “the current emphasis on export-led growth in developing countries is

not a viable basis on which all countries can grow together under present

structural conditions and macroeconomic policies” (Blecker 2003). Palley (2002)

goes further and contends that the ELG model followed by many developing

countries during the last few decades was part of the so-called “Washington

consensus” emphasis on trade liberalization. As a solution, Palley proposes a

new development paradigm based on domestic demand-led growth (DDLG).

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33
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