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Impact of Indias External Policies on Trade Performance
in Pre and Post reform Periods1
By - Dr. Ruby Ojha,Associate Professor,
Department of Economics, PGSR,SNDT Womens 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
1Paper 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 Indias 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 Indias foreign trade was the result of the belief of freedom fighters
that Indias colonial past marked by extensive and intensive exploitation through
the instrument of international trade was the major cause of Indias economic
underdevelopment. On the eve of independence both the composition and
direction of Indias foreign trade reflected the trend of a typical colonial and
agricultural economy. During this period Indias 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 Indias 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 Indias 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
current
prices)
Imports % of
Imports to
GDP1950-51 to
1959-60
11653.7 802.7 6.89
1960-61 to 26470.3 1490.1 5.62
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1969-701970-71 to
1979-80
73798.8 4511.3 6.11
1980-81 to
1989-90
255838.3 19897.6 7.77
1990-91 to1999-2000
1053204.6 112683.8 10.70
2000-01 to
2007-08
2862547.25 518334.88 18.11
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, Indias 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
Srinivasans (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 Indias 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
current
prices)
Exports % of
Exports to
GDP1950-51 to
1959-60
11653.7 602.0 5.17
1960-61 to
1969-70
26470.3 953.3 3.60
1970-71 to1979-80
73798.8 3769.6 5.10
1980-81 to
1989-90
255838.3 13174.6 5.14
1990-91 to
1999-2000
1053204.6 93729.0 8.89
2000-01 to
2007-08
2862547.25 377561.75 13.18
Source: various issues of Economic Survey, Government of India.
The pertinent question therefore, is whether the undoubted stagnation in Indias
export earnings during these decades, was beyond Indias 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, Indias exports and percentage of Indias exports in world exports
is shown in Table 3. The table shows that Indias export as percentage to world
exports kept declining from 2.5 in 1947 to 0.9 in 1966.
Table 3
Indias Exports and Share of Total Value of World Exports, 1947-66
Calendar Year World Exports
(U.S. $ million)
Indian Exports
(U.S. $ million)
India Exports as %
of World Exports1947 48549 1234 2.51948 54058 1371 2.51949 55102 1288 2.31950 57110 1146 2.0
1951 77140 1611 2.11952 74170 1295 1.71953 74930 1116 1.51954 77670 1182 1.51955 84550 1276 1.51956 93880 1300 1.41957 100880 1379 1.41958 96180 1221 1.31959 101780 1304 1.31960 113200 1333 1.21961 118700 1396 1.2
1962 124700 1403 1.11963 136000 1631 1.21964 152600 1749 1.11965 165500 1686 1.01966 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 countrys 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 Indias Export Growth, 1950-2005 (US $ Million)
Period Average Annual Growth Rates Indias Share in
World Exports,
(Average)
Indias Exports
of Goods and
Services (% of
GDP) AveragesGoods Services Goods ServicesIndia World India World
1950-59 0.22 6.30 3.78 NA 1.39 NA NA1960-69 3.58 8.77 1.78 NA 0.90 NA 4.211970-79 17.97 20.41 26.61 NA 0.54 NA 5.201980-85 2.39 -0.86 3.79 0.36 0.47 0.81 6.051986-90 17.76 12.36 10.47 14.14 0.48 0.63 6.291993-97 13.30 10.56 14.10 9.22 0.60 0.59 10.501999-01 10.26 4.09 9.52 3.07 0.66 1.07 12.522002-05 25.29 17.58 45.36 15.16 0.81 1.64 17.19Source: Veeramani, C., Sources of Indias Export Growth in Pre- and Post-Reform
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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 Indias
merchandise exports improved to 3.6 percent per annum. The share of Indias
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 Indias 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 Indias
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 Indias 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 Indias 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 Indias export percentage to GDP increased 5.10
in 1970s. In Table 4 we can see that Indias 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, Indias 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 decades 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 Indias 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 Veeramanis 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
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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
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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 governments 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 Indias exports also decelerated sharply. Though, during the second half
of the 1980s, the world economy recovered and Indias exports also grew at
17.76 percent per annum (Table 4). According to Joshi and Little (1994), there
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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
Indias Share in World Exports
(US $ million)
Year World India Indias
Share in
World
Exports
(%)
Change over the
Previous Period (%)
World India
1970 313804 2031 0.6 -- --1975 876094 4665 0.5 179.19 129.691980 1997686 8486 0.4 128.02 81.911985 1930849 8904 0.5 -3.35 04.931990 3303563 18143 0.5 71.09 103.762000 6254511 41543 0.7 89.33 128.982005 10306710 103404 1.0 64.79 148.912006 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 Veeramanis growth decomposition exercise, for the first
time actual exports were higher than the potential offered by the growth of world
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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 Indias commitment to the WTO, in the post-reform
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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
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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, Indias 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
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service exports of India and that of the world declined in absolute value after1998
from the level in the previous year (Table - 4). Indias 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, Indias 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, Indias
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
Indias export to GDP increased to 8.89 in 1990 as compared to 5.14 during
1980s. Table 5 also shows that Indias 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 Veeramanis (2007) growth decomposition exercise during 1993-
2005 the actual growth rates of Indias merchandise and service exports have
been above the potential offered by the growth of world trade mainly due to
positive competitiveness effect. Share of Indias 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 Indias 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.
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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 countrys 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
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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.
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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,
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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
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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 Indias exports, are in the grip of a recession.
Table 6 gives percentage change in real GDP of countries which are Indias
main trading partners. The results of a study The Impact of Global Slowdown on
Indias Exports and Employment by UNCTAD India team (May, 2009) show that
Indias exports to world are very responsive to income changes. A 1% decline in
GDP growth of world will lead to 1.88% decline in Indias 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 /
Year
2006 2007 2008 2009P 2010P
United
States
2.80 2.00 1.10 -4.00 0.00
Euro area 3.00 2.60 0.70 -4.10 -0.30Canada 3.10 2.70 0.50 -3.00 0.30United 2.80 3.00 0.70 -3.70 -0.20
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KingdomJapan 2.00 2.40 -0.60 -6.60 -0.50India 9.70 9.00 6.00 4.30 5.80China 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,
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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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