43
A Study of Foreign Trade and Review of Trade
Policy in India
Ravinder Kumar
Assistant Professor, Department of Economics, RBS College, Agra
ABSTRACT
Foreign trade has been one of the most significant determinants of economic development in a country which consist of invert and inflow and outward movement of goods and services. In pre independence period, India’s foreign trade was confined to exports of foodstuff and raw material to industrialized products from these countries. During post independence era, in order to accelerate the process of industrialization developmental imports were encouraged. During 1952-53to 1956-57, liberal trade policy was adopted. Import licenses were granted on large scale on one side and exports controls were relaxed to a grant on the other side. During 1975-76 to 1978-79, globalization has made the national market more interdependent than earlier. The year 1977-78 initiated in a new era of import liberalization in the country. The annual import policy of 1980-81 to 1984-85 also followed the liberal approach. By 1990, 31 sectors were freed from industrial licensing. Since 1991, India has carried out a substantial liberalization of trade in services along with freeing up of foreign investment.
INTRODUCTION
Foreign trade plays a significant role in the economy of any country. In the words of Robertson, “Foreign trade is an engine of economic growth. Foreign trade has been one of the most significant determinants of economic development in a country. The foreign trade of a country consists of inward and inflow and outward movement of goods and services, which result into outflow and inflow of foreign exchange from one country to another country. During present times, international trade is a vital part of development strategy and it can be effective instrument of economic growth, employment generation and poverty alleviation in an economy. The traditional pattern of development shows that resources are transferred from the agricultural to the manufacturing sector and then into service sector in an economy.
“Trade is essentially an international transformation of commodities inputs and technology which promotes welfare in two ways. It extends the market of a country‟s output beyond national frontiers and may ensure better prices through exports. Through imports, It makes available commodities, inputs and technology which are either not available or are available only at higher prices, thus taking consumers to a higher level of satisfaction”. The foremost principle of foreign trade, viz, „the law of comparative costs‟, which signifies that what a country exports and imports is determined not by its character in isolation but only in relation to those of its trading partners that can give us more of all goods than can own domestic production possibility frontier. The extension of foreign trade, according to Ricardo “will very powerfully contribute to increase the mass of commodities, and therefore, the sun of enjoyments”. This will be true for each trading nation. In modern terminology, “trade is a positive sum game” and every nation involved in it is bound to benefit from it.
In the words of Haberler, “International trade has made a tremendous contribution to the development of less-developed countries in the 19th and 20th centuries and integration Due to the integration with the world economy the entrepreneurs can have easy access to the technological innovations. They utilize the latest technology to enhance their productivity.
44 tune with external environment. The Government introduced liberal exchange rate system by allowing convertibility at market rate the set up trading houses to promote exports. EXIM policies were announced to liberalize the trade sector and allow several tax benefits. Five-year EXIM policies of 1992-1997, 1997-2002, 2002-2007 and 2009-2014 made efforts to streamline the liberalized trade sector with an emphasis on export promotion. In fact, the trade reforms were part of outward looking policies with the major aim of export promotion. It is firmly believed that once the export sector takes off and earns sufficiently, it can easily tackle the growing deficits on the external front. The concept of Globalization is considered as an important in the reform structure and is also the trend of growing worldwide interconnectedness. The changing scenario, which is advancing with favorable result, has four fundamental points as its perspectives: (1) there should be on trade barriers in order to permit free flow of goods across national borders, (2) a congenial investment environment in which there is free flow of capital amongst the nations, (3) conditions permitting free flow of technology, and (4) flow of labor (skilled and unskilled) across the national barriers. In fact, the Globalization will create cohesiveness in the world economy through investment, trade, capital flow and off-course the migration of labor internationally.
The Government of India has initiated a number of measures by commencing the era of economic reforms in July 1991, to „open up‟ the foreign trade sector and has ownership or operation of state owned enterprises. Thus the term refers to private purchase of all or part of a company. It covers „contracting out‟ and the privatization of management though management contracts, leases or franchise arrangement”. Stuart M. Butler defined privatization as “the transfer of government assets or functions to the private sector”. Thus privatization covers three sets of measures (a) ownership measures, (b) organization measures and (c) operational measures. This research paper represents a study of Foreign Trade and Trade Policy in India
Trade Policy of India
Before independence India did not have a clear trade policy, though some type of import restriction-known as discriminating protection-was adopted since 1923 to protect a few domestic industries from foreign competition (Bhattacharyya, 1979). It was only after independence that a trade policy as part of the general economic policy of development was formulated by the Government of India.
The history of India‟s trade policies since independence can be divided into three main phases (Panagariya, 2004a): [i] 1950-1975, when India followed a restrictive trade regime
[ii] 1976-90, when primary steps towards liberalization were taken place especially during the second half of the decade of 1980‟s and
[iii] From 1991 onwards, when a deeper liberalization process was undertaken. Let us now discuss briefly the features of the policies adopted during the three phases.
[i] Period of Restrictive Trade Regime: 1950-1975
The trade policies varied with restrictiveness during different five year plans covering the period 1950-1975. It was rather light during the First Plan (1951-56), intensely severe during the Second (1956-61), somewhat less so during the Third (1961-66) (except in the last two years) and perhaps equally so since then (right up to 1975) (Bhagwati and Srinivasan, 1975).
In the early fifties (1950-56) there was a rough equilibrium in the balance of payments, with import demand more or less equaling export earnings. There was no clear EXIM policy and import restrictions of any kind were not in use. In fact during the period covered by the First Plan (1951-56), import licenses were granted in a liberal manner and efforts were made to encourage exports by providing incentives to exports, reducing export duties, relaxing export controls and abolishing export quotas. However, these measures finally led to tremendous increase in imports whereas export did not increase appreciably.
45 1950‟s. The foreign exchange shortage was also adjudged as the chief bottleneck to economic growth (Krueger, 2008). Non-tariff controls implemented through import licensing system were the principal means of regulating imports. Imports of consumer goods were generally banned, excluding those which were imported by canalizing agencies of the Government. The Open General License (OGL) was discontinued; instead limited quotas in respect of essential commodities were granted to the importers on the basis of their actual imports in the past. In addition, high tariffs were imposed even on those goods whose imports were permitted (Bhagwati and Desai, 1970).
When severe import restriction and import substitution were the focus of the trade policies adopted during the second half of the 1950‟s, exports were not considered a line of activity to be stimulated initially. As a result, except for a few items such as iron ore, stagnation of export earnings was observed in this period. The export policy had also led to the falling share of India‟s traditional exports and insufficient expansion in the case of non-traditional exports. In early 1960s, in view of the prevailing conditions of balance of payments in the country with rising import expenditure and stagnant export earnings, the much needed attention was finally given to the export sector. In line with the recommendations of the Mudaliar Committee, the Government adopted the policy of export promotion (Bhagwati and Desai, 1970). On the import front, imports of non-essential goods were restricted whereas imports of essential goods were liberalized. The schemes introduced by the Government for facilitating promotion of exports during this period were Cash Compensatory Support (CCS), Duty Drawback System, Import Replenishment Scheme (IRS) (previously termed as Import Entitlement scheme (IES). Export Processing Zones (EPZs) were established providing almost free trade environment for export production. In 1960 the Government for the first time allowed the coming up of the export houses. But despite this vigorous export promotion drive on the part of the Government the volume of export could not increase to the desired level and the problem of adverse trade balance persisted. By 1966 there was again a trade balance crisis as the imports needed to carry out planned investments and to provide intermediate goods and raw materials would have required much more foreign exchange than was available (Krueger, 2008).
In June, 1966 an important switch in policy came when the Government devalued Indian currency from 4.7 rupees to 7.5 rupees per dollar (Panagariya, 2004a) and alongside took hesitant steps towards liberalization of import licensing, tariffs and export subsidies. But within two years the Government backed off its commitment to liberalization for a number of reasons.
By the late 1960s the Government once again resorted to a restrictive trade policy and further tightened the import controls. During these years India‟s trade regime had become so restrictive that the proportion of oil, non-cereals imports in GDP declined from an already low level of 7% in 1957-58 to an even lower level of 3% in 1975-76 (Pursell, 1992). As pointed out by Pursell (1992), such policy measures had led to high production costs in many industries even if India had had diverse industrial structure and achieved high degree of self-sufficiency. Besides, industries suffered from the general problem of poor quality and technical backwardness.
It was in the mid-1970s the adverse effects of restrictive import policy were gradually realized, particularly on the profitability of the industry. Also, improved export performance and remittances from overseas workers in the Middle East contributed to the accumulation of a large reserve of foreign exchange which made the Government confident for adopting trade liberalization measures (Panagariya, 2004a). As a consequence, from late 1970s Government started a slow and sustained relaxation of import controls along with adopting export promotion measures which was further carried during the eighties. Thus, from the latter half of the 1970s the country stepped into a new era of trade liberalization, which we will discuss next.
[ii] Primary Steps Towards Liberalization: 1976-1991
The year 1977-78 initiated a new era of import liberalization in the country. In fact, during this period import liberalization policy was adopted by the Government as a part of the programme of anti-inflationary import policy. The annual import policies of 1980-81 to 1984-85 also followed the liberal approach. However, the pace of reform was picked up significantly only after 1985. In April 1985, the first of the three-year import-export policies covering the period 1985-1988 was announced. The second policy, which was announced in March, 1988 covered the period 1988-1991. It was an extension of the earlier import-export policy of 1985-88. The second policy was to expire by March, 1991 but after terminating the policy a year in advance, the Government announced on 30th April, 1990 a new import-export policy of 1990-93.
46 without an import license were steadily shifted to the OGL category. The number of capital goods on the OGL list increased from 79 in 1976 to 1170 in 1988 (Panagariya, 2004a). Moreover, the import licensing of capital goods in the restricted list was administered with less stringency. In the case of intermediate goods also, there was a steady shift of items from restricted and limited permissible category to the OGL category. Also, monopoly rights of the Government for the imports of certain items through canalized agencies had been lowered.
Several export promotion measures were also undertaken or expanded in order to encourage exports during this period, especially after 1985. For instance, the Export Oriented Units (EOU) scheme was implemented in 1981 to provide duty-free access to imports of all inputs for export-oriented companies and to create a single point clearance with regard to industrial licensing and foreign collaborations. The formation of EXIM bank in the early 1980‟s marked another significant development towards improved financial flow for exporters. In the mid-1980s the number and value of incentives offered to the exporters were increased substantially and imports were tied to exports. Registered exporters were permitted to import capital equipments against REP (Registered Exporters Policy) licence. In 1990 a scheme called Export Promotion Capital Goods (EPCG) was incorporated for import of capital goods at concessional duty by manufacturer-exporters.
The decade of the 1980s also witnessed a significant relaxation of industrial controls which actually reinforced the ongoing external liberalization process. With a view to increasing the productivity and profitability of the existing industrial and commercial establishments and to create a favourable atmosphere for the incumbent producers and businesses, the Government simplified the complex system of licenses required for production and particularly for investment and product diversification (Alessandrini, Fattouh and Scaramozzino, 2007). By 1990, thirty-one sectors were freed from industrial licensing for which these sectors could freely import machinery without any industrial license clearance (Panagariya, 2004b).
Thus, the industrial policies and the trade policies announced in the latter half of the 1980s brought about some major simplifications in India‟s import regime. However, the stringency of the regime did not dilute substantially. The process of external liberalization was slow and fragmented. As argued by economists, the policy changes in India in the 1980s were pro-business rather than pro-market (Rodrik and Subramanian, 2004; Kohli, 2006a, 2006b). The focus of the Government in the 1980s was more on raising the profitability of the existing industrial and commercial establishments by easing restriction on capacity expansion, removing price controls, reducing corporate taxes etc whereas external liberalization did not take place to any significant extent in this decade.
By contrast, the pro-market orientation of the period 1991 onwards sought to pursue economic liberalization with the aim of removing impediments to markets (Rodrik and Subramanian, 2004). The previous initiatives towards liberalization and the removal of the system of licenses were intensified. But the main aim of the strategy was decisively shifted to give a higher priority to the lowering of the barriers to trade and to the enhancement of international integration. We next move into the discussion of the fundamental changes in India‟s trade policies that had taken place in this third phase starting from the year 1991.
[iii] Period of Deeper Liberalization: 1991 onwards
47 was terminated mid-way and replaced by Foreign Trade Policy of 2004-09. In 2009, the Government announced another five-year Foreign Trade policy covering the period 2009-2014 (Government of India, Economic Survey, various issues). The major policy reforms during this third phase are as follows:
- Before 1991, quantitative restrictions were the dominant means for control of imports. Imports of consumer goods were virtually prohibited through quantitative restrictions whereas the imports of intermediate goods and primary goods were submitted to very restrictive licensing. However, the reforms in 1991 did away with import licensing virtually on all intermediate inputs and capital goods. A negative list consisting mainly of consumer goods remained under licensing which were finally freed of licensing after a decade later under the obligation of mutual agreement between the US and India, within the provisions of WTO (Mehta, 2000). Hence, India removed half of the remaining quantitative restrictions by April 1, 2000 and subsequently all quantitative restrictions by April 1, 2001, except for a handful of goods that are disallowed on environmental, health and safety grounds and a few goods which are imported through canalized agencies.
- In the 1980s, tariff rates in India had been increased substantially which turned the quota rents into tariff revenue for the Government (Panagariya, 2004b). On the eve of the reforms in 1991, the highest tariff rate was 355%, the simple average of all tariff rates was 113% and the import weighted average of all tariff rates was 87%. In order to further eliminate the impediments to free trade the Government had started to lower the tariff rates in a gradual manner by compressing the top tariff rate and rationalizing tariff structure through a reduction in the number of tariff bands. The Government, following the recommendations of Tax Reforms Committee, reduced the peak level of tariff to 150% in 1991-92, 110% in 1992-93, 80% in 1993-94, 65% in 1994-95 and 50% in 1995-96. Though there were some reversals in the form of special duties and unification of low and high tariff rates in the later period, the general direction had been towards liberalization with the top tariff rate coming down to 25% in 2003-04 and further to 20% in 2007-08. - As part of the reforms of 1991, the Government devalued the rupee by 22% against the dollar from 22.2
rupee to 25.8 rupee per dollar (Panagariya, 2004b). This adjustment was followed by an important move by the Government towards liberalization of exchange rate control regime with the introduction of a dual exchange rate regime. In EXIM policy of 1992-97 the government introduced the dual exchange rate system called Liberalized Exchange Rate Management System (LERMS) under which 40% of the proceeds of exports and inward remittances were redeemed to the Reserve Bank of India at the official exchange rate while the remaining 60 % could be exchanged on the free market. In March 1993, the LERMS was replaced by a unified exchange rate system and the system of market determined exchange rate was adopted. In August 1994, full convertibility has been established for current account transactions. Receipts and payments on capital account, however, continued to be subject to controls.
- Prior to reforms in 1991, several commodities were subject to export controls. In EXIM policy of 1992-97, the number of goods subject to export control was reduced substantially from 439 in 1991 to 296 with prohibited items reduced to 16. The number of commodities subject to export restrictions was reduced further in later years. At present, only a small number of items on health, environmental or moral ground are subject to export prohibition whereas export controls apply to only a small number of commodities like fertilizers, cattle, pulses, cereals etc. The EXIM or Foreign Trade Policies announced in 1990s and 2000s had decisively followed an export led growth strategy and entailed several institutional, infrastructural and fiscal measures to promote exports. Several export promotion schemes such as Market Access Initiatives (MAI), Marketing Development Assistance (MDA), Status Holders Schemes, Assistance for States for Infrastructural Development for Export (ASIDE), Target Plus scheme, Served from India Scheme, Agricultural Export Zones (AEZs), Focus market Scheme (FMS), Focus Product Scheme (FPS), High-tech Products Export Promotion Scheme (HTPEPS) were introduced by the Government to boost exports. Extension of earlier duty exemption and remission schemes or introduction of new such schemes for example, Duty Free Import Authorization scheme (DFIA), Duty Entitlement Pass Book scheme (DEPB) were the important steps undertaken by the Government towards promotion of exports. The Government also encouraged establishment of Export Oriented Units (EOU), Electronics Hardware Technology Parks (EHTP), Software Technology Parks (STP), Bio-Technology Parks (BTP), Export Processing Zone (EPZ) or Special Economic Zone (SEZ) which provide internationally competitive and hassle-free environment for exports. Through allowing customs free trade, income tax reductions or waivers, streamlined administration and cheaper and better utilities SEZs are created to increase export oriented manufacturing or services activities, to promote transfer of technology as well as to boost foreign direct investment. - Since mid-1980s, FDI was allowed to enter in the industrial sectors but the Government was initially very
48 streamlined and further liberalized the FDI regime. The limit of FDI participation in equity capital had been raised progressively and by 2001 the Government decided to allow 100% foreign investment in several industrial sectors.
- Since 1991, India has carried out a substantial liberalization of trade in services along with freeing up of foreign investment. Traditionally, service sectors have been subject to heavy government intervention. There were restrictions on entry by private domestic and foreign providers and prices of services were largely fixed by the Government (World Bank, 2004). In contrast, the two decades 1990s and 2000s witnessed significant liberalization in services, with greater freedom of establishment to domestic and in some cases, foreign providers, greater operational autonomy for the providers and greater reliance on market-based allocation mechanisms. The services sector which has been significantly liberalized is telecommunications (Arnold, Javorcik, Lipscomb and Mattoo, 2011). The other sectors which are also liberalized are banking sector, insurance sector and transport services. Personal services including accounting, legal and other service sectors such as retail distribution, postal and rail transport services are, however, formally closed to foreign participation. Nevertheless, for entire services sector considerable progress was made towards opening the door wider to private sector participation, including foreign investors.
Thus, the policy regime in India with regard to liberalization of the external sector has witnessed a perceptible change in the last two decades. However, India‟s approach to openness has been cautious, contingent on achieving certain pre-conditions to ensure an orderly process of liberalization and ensuring macroeconomic stability (Seshadri, 2009; Banga and Das, 2012).
CONCLUSION
The main criticism of the new FTP seems to be that although it aims to help labour- intensive sectors reduce transaction costs and in general help exporters through the global economic downturn; its provisions do not meet these objectives fully. For example, the provisions do not meet these objectives fully. For example, the provisions to reduce transaction cost do not take into consideration the significant linkage between high transaction costs and infrastructural deficiencies. Merely reducing application fees and implementing electronic payment system will lead to substantial and beneficial reduction in transaction cost for exporters. More emphasis needs to be placed on the improvement of the existing infrastructure such as power, energy and transportation. In addition, the poor selection of markets for providing FPS incentives in regard to specific labour- intensive products without due regards for the opportunities generated through regional trading aggrements would reduce the benefits from this initiative.
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