Financial Daily
from THE HINDU group of publications

Tuesday, May 30, 2000



Opinion | Next

Looking back at India's trade policy

Amitendu Palit

THE EXTENT of openness of an economy is judged by the permissiveness of its trade policies. An economy becomes more open with greater liberalisation of exports and imports. The openness is also an indicator of the extent of global integration of the country. Opening up is associated with progressive dilution of protection, as tariff and non-tariff restrictions are withdrawn gradually. Freer movement of goods and services creates greater scope for international trade to shape the growth of th e economy.

India's external economy changed significantly in the last two decades. A gamut of new policies was implemented in the external sector during this period. Though the majority of these came into force in the 1990s, the restructuring process had begun in t he 1980s. Over these two decades, the trade policy regime graduated from an inward-looking, protected perspective, to an open, globally-integrated one.

The previous two decades can be divided into three sub-periods on the basis of the trends in the trade-GDP ratio. This ratio can be taken as an indicator of the ex-post openness of an economy. The incremental trade-GDP ratio for India has three distinct trends for the period under consideration (1980-81 to 1998-99). The three sub-periods, as per the observed trends are:

1980-81 to 1986-87: In this period the trade-GDP ratio declined from 14.1 per cent in 1980-81 to 11.2 per cent in 1986-87 and the incremental trade-GDP ratio grew at -3.7 per cent. Imports grew more than exports, with the import-GDP ratio (7.9 per cent) remaining consistently above the export-GDP ratio (4.7 per cent). Exports however, maintained an increasing trend despite growing less than imports. The trade-deficit ratio for the period was fairly high at 3.16 per cent.

1987-88 to 1995-96: This span of nine years was arguably the best period for India's external sector in the last 20 years. Among the three sub-periods, this was the only phase with a positive growth in the incremental trade-GDP ratio (6 per cent). The gr owth of exports (14.4 per cent) overshot the growth of imports (10.6 per cent), sharply reducing the erstwhile high gap between export-GDP and import-GDP ratios to only 1.34 percentage points. With the two ratios coming closer, the trade deficit-GDP rati o improved considerably. Exports, as a proportion of imports, expanded, with the export-import ratio climbing to 82.9 per cent, from 60 per cent in the previous period.

1996-97 to 1998-99: The later part of the 1990s was not as good for India's external sector as the earlier years. The incremental trade-GDP ratio declined to a negative growth of -1.2 per cent. Export growth, too, fell below import growth, increasing the trade deficit to GDP ratio. And, for the first time, the incremental export-import ratio recorded a negative growth of -2.5 per cent.

The above analysis broadly illustrates the behavioural trends of India's external trade in the last two decades. Based on the above, the following observations can be made:

1. The first half of the 1980s was a relatively poor period for Indian trade. Exports lagged behind imports, and the latter too, were limited in growth. As a result, the trade deficit widened and the volume of trade as a percentage of GDP declined.

2. External trade revived from the mid-1980s. From 1987-88 onward, exports began picking up fast with 1987-88 recording the highest export growth (24.1 per cent) for the two decades. Exports grew faster than imports till 1994-95. The sustained heavy grow th in exports improved the trade balance considerably, reducing the trade deficit to GDP ratio.

3. The turnaround of the external sector begun after implementation of proactive liberalisation measures in the mid-1980s. The liberalisation process, which was sporadic earlier, picked up momentum in the second half of the 1980s, with the announcement o f the first long term trade policy (1985-88). Specific measures such as replacement of quotas with tariffs in select commodities, pruning the number of canalised imports and improving access of exporters to imported inputs, helped in imparting the `big p ush' to exports.

4. The restructuring of the 1980s was carried on in the 1990s. Various controls and restrictions on imports and exports were dismantled gradually. The external sector reacted positively to the policy changes. Except for 1991-92 (an exceptional year of ma jor BoP difficulties due to the Gulf crisis), exports continued to grow, remaining consistently above imports, and the trade-GDP ratio kept on improving.

5. Sustained high growth of exports in the period 1987-88 to 1995-96 indicates fundamental changes in the structural pattern of Indian exports. A horizontal shift in Indian exports, from primary to manufactured produces, precipitated the high growth. In the 1990s, there was a realignment within manufactured products towards export of new, non-traditional items. The growth in exports could not have been sustained without greater diversification and value-addition. The increasing diversification helped In dian exports to offset the loss of the East European market in the late 1980s and make inroads into other emerging regional markets.

6. The rapid rise in the export-import ratio is one of the key features of India's trade performance in the late 1980s and the early 1990s. The incremental export-import ratio had an average growth of 4.2 per cent in the period 1987-88 to 1995-96. The ac celerated growth of exports, as a proportion of imports, underlined the economy's increasing ability to finance imports and the growing self-sufficiency in the external sector.

7. The trade performance deteriorated in the later half of the 1990s. The basic reason for the relatively poor performance was the falling growth of exports, with the incremental export-import ratio suffering an absolute decline. Indian exports were affe cted adversely by the appreciation in the real effective exchange rate (REER), due to sharp devaluation of currencies in South East Asian economies, subsequent to the financial crisis in the region. Apart from the rising exchange rate, stray dumping and fluctuating oil prices also created problems. The disturbed state of the external sector in the later part of the 1990s is reflected in the inflated import bill and the mounting trade deficit.

8. The buoyancy in the external sector in the late 1980s and the early 1990s can be attributed to effective synchronisation of right policies. Measures taken in the 1990s were in correct sequence to those of the 1980s, enabling the external sector to gro w and expand. The robust trade performance in the period 1987-88 to 1995-96 was led by exports, with India's share growing in world trade. High growth of exports improved the trade balance, besides generating resources for imports. In the later part of t he 1990s, exports decelerated sharply.

9. The economy has opened up significantly, as indicated by the progressive rise in the trade-GDP ratio. Taking openness as an indicator of global integration, the economy is on the path of globalisation. In this context, it is important to bear in mind the size of the economy. Given the large size and significant domestic economy, generating export surplus has not always been easy in India. The non-tradable sectors continue to be important contributors to GDP. While other smaller economies may appear m ore open due to their much higher trade-GDP ratios, in India's case, its openness should be viewed in the light of the high weightage of its domestic sectors.

(The views expressed in the article are personal.)

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