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India’s trade policy: Which way now?

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Abstract

This paper delineates the changes in India’s trade policy regime in the larger context of India’s changing development strategy. What started as protection during “planning for industrialization” in an economy with binding foreign exchange constraint in the 1950s evolved to a relatively open economy with lesser barriers to trade. The process of change in the trade sector has been sequential over a relatively long period of time, the process being complemented by wide-ranging policy shifts in other sectors of the economy. However, there is an evidence of rising market-driven entry barriers, which is often thought to impact the trade sector adversely. Along with this, the process of trade policy changes has been reversed with rise in tariff barriers across some sectors in the recent period, which is a cause for concern especially in the context of improving competitiveness of tradeables and growing integration of the domestic economy with the world economy.

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Notes

  1. Nayyar (1994) develops this view in great detail. For instance, while developments in the foreign trade sector, exports in specific, are linked to India’s economic growth and diversification on the supply side (Sinha Roy 2004), imports of capital goods are found to have aided India’s economic growth over the long period (Banerjee and Sinha Roy 2014). On the demand side, cross-country evidence often shows that exports cause economic growth (see Michaely 1977; Balassa 1978). World Bank (1993) has also attributed high growth experience in East Asia to export growth. Panagariya (1993) takes the argument further by making a case for trade policy that promotes exports thereby augmenting productivity essential for growth. However, in case of India, the demand side relationship of exports aiding growth is not found to be strong (Sharma and Panagiotidis 2005).

  2. Eichengreen (1984) is of the view that Keynes was also aware of the possible harmful long-run effects of protectionism, especially those which involved special interest groups. Further, as Eichengreen (1984) shows, prior to the onset of the Great Depression, Keynes had argued in favour of free trade by saying that Britain should "…hold free trade in the widest interpretation…".

  3. The experience of Japan illustrates that import substitution was essentially a process of learning leading to productivity improvements (Bruton 1989: 1635).

  4. Bruton (1989: 1603).

  5. An excellent summary of the different approaches has been provided by Rodrik (1995).

  6. These are observations of Little et al. (1970), based on a detailed study on Argentina, Brazil, India, Mexico, Pakistan, Philippines and Taiwan.

  7. See Balassa (1989: 1684).

  8. Chakraborty (2002) makes an important distinction between “liberalization” and “reform” in the Indian context, the difference between the two terms being dependent on the positions taken by the protagonists of the process of change. However, in this essay, the two terms are used interchangeably.

  9. Trade reforms in India are often identified with Structural Adjustment Programme (SAP) initiated in 1991. This discussion, however, shows that trade reforms were initiated much before SAP, which carried the process forward. Panagariya (2003b) views that success with reforms in the 1980s made a case for further reforms.

  10. Import substitution was based on the Industrial Policy Resolution, 1948 and the Industries (Development and Regulation) Act, 1951. The operational norms of the private corporate sector were laid down in the Companies Act, 1956. Marathe (1986) provides an extensive account of the extent of industrial control till the late 1970s.

  11. Industrial sector reforms, which were initiated in early 1980s, include industrial delicensing, raising capacity limits across industries, broadbanding of industries, fixing up of minimum efficient scale of production across industries, raising asset threshold for MRTP companies and expanding the list of such industries, raising investment limits for small-scale units, among other initiatives. Rodrik and Subramanian (2005) ascribe these initiatives since the early 1980s as pro-business reforms as against pro-market reforms.

  12. Helleiner (1994) views that exchange rate policy is used for achieving internal and external balance, while trade policy relates to incentives for production and trade.

  13. Some attempts to liberalize trade in the 1980s include bringing capital goods and intermediate inputs under “Open General Licence”, decanalization of imports apart from raising value limits of imports for technological upgradation.

  14. Hussain Committee (1984) perceives tariffs to be more efficient, lesser distortionary and amenable to lesser corruption than QR’s.

  15. Panagariya (2003a) views that the tariff increases transferred rents from the importer to the government.

  16. The Export–Import Policy 1992–1997 aimed at removing QR’s and reducing tariff rates on imported items. By mid-1990s, QR’s remained only on some consumer goods due to balance of payments considerations.

  17. The remaining QRs on consumer goods were phased out by 1 April 2001 under WTO obligations. Since the 2000s, the other major reform initiative was the dereservation of small-scale units.

  18. For details on India’s tariff structure, refer to Panagariya (2003a, b), Mathur and Sachdeva (2005).

  19. In fact, fiscal incentives such as duty drawback schemes, tax relief or cash subsidies encouraged exports since early 1960s. The scope of these incentives widened over time.

  20. World Bank (1994).

  21. Marjit (1998).

  22. From November 1, 2000, the Export Processing Zones at Kandla, Santa Cruz (Mumbai), Kochi and Surat have been converted into SEZs. Approval had also been given for setting up SEZs at Nanguneri (Tamil Nadu), Positra (Gujarat), Kulpi (West Bengal), Paradeep (Orissa), Bhadohi and Kanpur (Uttar Pradesh), Kakinada (Andhra Pradesh), Dronagiri (Maharashtra) and Indore (Madhya Pradesh).

  23. Ahluwalia (2002) argues that the entire reform process in India has been gradual.

  24. Chaudhuri (1995), Kumar (1998, 2005), Nagaraj (2003), Pant and Srivastava (2015) provide in-depth understanding of reforms in FDI policies. For extensive reviews of industrial, trade and exchange rate policies in India, see Acharyya (2012), Joshi and Little (1996) and Panagariya (2008).

  25. However, inward-looking regulatory regime continued in the early 1980s.

  26. Kundra (2009) classifies the episode of FDI liberalization into four phases.

  27. Sen (2003).

  28. In March 1992, the Liberalized Exchange Rate Management System (LERMS), with a dual exchange rate system, was adopted converting 60% of the current receipts at a market-determined rate replacing Exim Scrips. This partial convertibility of the rupee is often viewed as surrogate devaluation (Pradhan 1992, 1993). In this system the RBI declared its rate and the Foreign Exchange Dealers Association of India (FEDAI) intimated their Indicative Rate (market rate) to the Authorized Dealers for dollars, mark, yen, and pound sterling. As a part of the LERMS, import of gold was permitted in order to thwart the thriving informal market for foreign exchange.

  29. Sen (2003) views that these RER appreciations followed large capital inflows.

  30. Kapur (1997) justifies such interventions in the conduct of the exchange rate policy during a market-based regime. An analysis of the exchange rate regime in the early 1990s is provided in Acharyya (2012).

  31. Since 1997, there was overwhelming response from market participants who had been largely unhedged or oversold to cover their positions as well as those who had taken on foreign currency debt to exploit the interest rate differential. In response, the RBI turned into a net seller of foreign exchange during November 1997.

  32. Rs 12,000 crores in July 2013.

  33. The rate was increased from 8.25 to 10.25%.

  34. For an extensive discussion of state-level trade and related policies, see Sinha Roy et al. (2015).

  35. Krugman (2018) provides an incisive analysis on the consequences of trade wars.

  36. Mitra (Mitra 2018a, b) have commented on such recent protectionist tendencies in India.

  37. Rangarajan (1994) discusses this issue at length.

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Acknowledgements

The authors extend sincere thanks to Pradyut Kumar Pyne for extensive help.

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  1. Department of Economics, Jadavpur University, Kolkata, 700032, India

    Avigyan Sengupta & Saikat Sinha Roy

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Sengupta, A., Sinha Roy, S. India’s trade policy: Which way now?. Decision 45, 129–145 (2018). https://doi.org/10.1007/s40622-018-0186-8

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