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" T,2 Foreign Tnde Constraints Arising from Foreign Trade and Import
Substitution based Policies INDIAN economic development strategy,
particularly relating to industrialisation has been driven by perceived foreign
exchange scarcities and the desire to ensure that scarce foreign exchange is
used only for purposes deemed 'essential' from the perspective of
development. Industrialisation and self-sufficiency in essential commodities
have been important objectives of policy because of the fear that dependence
on other, more powerful countries, for imports of essential commodities
would lead to political dependence on them as well. Nearly a decade before
Independence, in 1938, the National Planning Committee was set up by the
Indian National Congress (the political party that led the struggle for
Independence) under the chairmanship of the future prime minister Jawaharlal
Nehru. This committee viewed, "... the objective for the country as a whole
was the attainment, as far as possible, of national self-sufficiency,
International trade was certainly not excluded, but we were anxious to avoid
being drawn into the whirlpool of economic imperialism." Later the First-Year
Plan went further: "Control and regulation of exports and imports, and in the
case of certain select commodities state trading, are necessary not only from
the point of view of utilising to the best advantage the limited foreign
exchange resources available but also for securing an allocation of the
productive resources of the country in line with the targets defined in the
Plan."t 1. Planning Commission (1950). First Five Year Plan, p. 42. 484
Inward Looking StrategyIntliar Economl: Perfornance and Polieiet India
adopted an 'inward looking' strategy of industrialisation. This strategy relied
on encouraging domestic production for the domestic market behind high
tariffs and high degree of effective protection to the domestic industry. This
resulted in an uncompetitive domestic industrial structure. T.N. Srinivasan has
argued that the development strategy based on import substituting
industrialisation and the system of controls that were implemented failed to
produce rapid growth, self- reliance, and eradication ofpoverty, but instead led
to lacklustre growth, an internationally uncompetitive industrial structure, a
perpetually precarious balance of payments, and, above all, rampant rent
seeking and the corruption of social, economic and political systems.2 Far
from viewing foreign trade as an engine of growth, Indian planners sought to
minimise import demand and viewed exports more or less as a necessary evil
mainly to generate the foreign exchange earnings to meet that part of the
import bill not covered by external assistance. They created an elaborate
administrative regulatory machinery in an attempt to control investment and
resource allocation in the economy and ensure their consistency with five-year
plan targets. Controls over imports and exports were also part of this
regulatory system. Broad Tlends: Exports and ImPorts Exports 1. 1950 to
early 70s - Import substitution became the keystone of development strategy
in the late 1950s' Consequently, exports were neglected by the Government'
The value of exports as a percentage of GDP at market prices declined from
an average ofover 6 per cent (1950-51 to 1955-56) to less than 4 per cent in
the period following. This declining trend in the value of exports continues till
I97l-12 (Table 23.1). The decline is in spite of the introduction of many
incentive scheme for the exporters in the sixties. The sixties can be seen as the
period of induction of export orientation through incentive schemes for
exports along with import substitution. With the decision to devalue the rupee
in 1966, changes in tariffs and export subsidy policy, it was evident that the
policy-makers 2. Srinivasan, T.N. ,.Foreign Trade Policies and India's
Development", in Uma Kapila (ed.)' Indian Economy Since Independence,
ch.25 (2003-04 edition)' Forcign Trade4E5 were trying to use fiscal measures
to step up exports and curb imports. But, the incentives given to exporters
could not offset the bias against exports which was implicit in the over valued
exchange rate (except for 1966 devaluation) and the prevalent level of import
restrictions. TABLE _ 23.1 Current Account Ttansactions as Per Cent of GDp
at Market prices (19s0-1990) M X Trade Imports Exports BalanceX+M Net
InvisiblesCurrent Account Balance 1 950-5 I 1 960-6 I 1970-77 I 980-8 I I
990-9 10.4 0.5 -0.1 2.9 0.16.9 6.8 4.2 9.5 9.16.9 3.9 -J--1 4.9 6.3-2.9 -0.9 -4.6
-2.913.8 10.7 7.5 14.4 t5.4+0.4 -2.4 - 1.0 -r.5 -2.5 ifot? : Figures for 1990-91
are provisional. source: lndia's Balance of Payments = l94B-49 to 1989-99.
Department of Economic Analysis and Policy, Reserve Bank of India,
Bonbay, puUtiJhed in July 1993. 2. Early 70s to late 80s - The value of
exports as a percentage of GDP at market prices picked up after l97l-72 and
increased till end of seventies. Eighties again shows a declining trend in value
of exports with a recovery to over 6 per cent level onlyin the last couple of
years in eighties (Table 23.2).It was realised after fhe first oil shock of 1973
that India had to step up exports simply to finance the rising import bill on
account of an increase in oil prices. Eighties can be viewed as a period of
growing uneasiness with the policies of excessive protectionism. The Abid
Hussain Committee on import and export policies (1995-1939) recommended
more liberal access to imports by exporters. The second major
recommendations of the Committee was that the real exchange rate of the
rupee should not be allowed to appreciate and it should be maintained at a
level considered appropriate for ensuring the competitiveness of exports. 486
Irdian Econony: PerJormance and Policies TABLE - 23.2 Value of Exports
and Imports in the Planning Period (US $ Million) Year Exports Imports
Trade BalanceRate of Change Exports Imports l 950-5 I t960-6t r910-7 I
1980-8 1 1990-9 I t993-94 1994-95 1995-96 t996-97 1997 -98 1 998-99
1999-2000 2000-0 I 200t-02 2002-03 2003-04 2004-os 2005-061269 t2'13
1346 23s3 2031 2162 8486 15869 18143 24075 22238 23306 26330 286s4
31797 36618 33470 39133 35006 4t484 332t8 42389 36822 49671 44560
50536 43827 51413 52719 61412 63843 '78t49 80s40 109173-4 -1007 - 131
-73 83 -5932 -1068 -2324 -48 8l -5663 -6478 -9111 -r2849 -597 6 -75 86
-8693 -14306 -2863324.9 0.3 8.8 6.8 9.2 20.0 18.4 20.8 5.3 4.6 -5.1 10.8 2r.0
-1.6 20.3 2t.1 26.2-1.5 t6.1 3.5 40.2 13.5 6.5 22.9 2 8.0 6.7 6.0 2.2 17.2 t.'7 1.7
t9.4 27.3 39.'7 Source: Government of India, Economic Survey, 1998-99,
Statement 7.1 (B) p. S-81 and E c onomi c S u rv ey, 2O0O -0 1, 200 1 -02,
2OO3 -04, 2OO4-05, 2005-06, p. S-79. 3. 1990s - The 1990s have witnessed
an increase in the value of exports as a percentage of GDP at market price to
over 8 per cent from over 6 per cent level (Table 23.3). After the payment
crisis of 1990-91, when the foreign exchange reserves had fallen drastically
and were enough to pay for two weeks of imports, the process of economic
reforms was started in 1991. The chief elements of reforms are devaluation of
the rupee, liberalisation of import licensing, reduction in tariffs, abolition of
cash subsidies for exports, introduction of partial convertibility of the rupee on
the current account and later full convertibility of the rupee on the current
account. Foreign Tiade 487 TABLE _ 23.3 Current Account Tlansactions as a
Percentage of GDP at Current Market Prices 90s Exports XCurrent X+M
Account BalanceImports Trade M BalanceX, M(Vo) 1990-91 5.8 t991-92 6.7
1992-93 7.r 1993-94 8.3 t994-95 8.3 199s-96 9.1 1996-97 8.9 1997 -98 8.7
1998-99 8.3 1999-00 8.4 2000-01 9.8 200r-02 9.4 2002-03 10.6 2003-04
10.866.2 -3.1 14.6 86.1 -0.3 r4.4 71 .6 -r .7 I 6.5 84.8 -0.4 18.1 748 -1.0 19.4 7
4.8 -t .7 2t .4 69.7 -t.2 2t.6 69.7 -t.4 2t.2 72.t -1.0 r9.8 67,8 -1.1 208 75.8 -0.5
22.8 85.2 0.2 21.4 85.8 1 .2 23.3 81 6 1.8 24.18.8 7.7 9.4 9.8 11.1 12.3 t2.1
12.5 11.5 12.4 r 3.0 12.0 t2.1 13.3-3.0 - 1.0 )1 -i.5 -2.8 -5.1 -3.8 -3.8 -3.2 -4.0
-3. I -2.6 )1 -2.5 * Export-Import ratio is not given as a percentage of GDP at
cunent market prices Economic Suneys. After three successive years of robust
growth at an annual average of I9.7 per cent (in US Dollars) during 1993-94 to
1995-96, export momentum slowed down since 1996-9'7, with exports
registering a modest growth of 5.3 per cent and decelerating further to 1.5 per
cent in 1997-98. Both global and domestic factors have contributed to the
slowdown in export growth in India since 1996-97. The share of East Asian
Countries in India's exports was around one-sixth before the crisis, India could
not escape the fall out from the import compression in these countries. The
slump in global trade and continued recessionary phase has caused not only
import contraction, but has also triggered protectionist measures. Amongst the
domestic factors that continue to hamper exports infrastructure constraints,
high transaction costs, SSI reservations, labour inflexibility, quality problems
and quantitative ceilings on agricultural exports rernain problematic. The
$rowth of exports picked up in 1999-2000 and [Link] : Source:
488Indian Econonl: Perfornance ail Policiet India's merchandise exports (in
dollar terms and customs basis), by continuing to grow at over 2O per cent per
year in the last 3 years since 2002-03, have surpassed targets. In 2004-05,
export growth was a record of 26.2 per cent, the highest since 1975-76 and the
second highest since 1950-51. Supported by a buoyant world economy (5.1
per cent). The good performance of exports (growth of 18.9 per cent)
continued in April-January 2005-06, despite the slightly subdued growth of
global demand, and floods and transport disruptions in the export nerve
centres of Mumbai and Chennai. TABLE _ 23.4 Performance of the Foreign
Trade Sector (Annual Percentage Change) Year US DollarExport Value in in
US DollarImport Value 1 990-2000 I 990-95 1 995-2000 2000-0 1 200t-02
2002-03 2003-04 2004-05 2005-06 (April-January)1 .'I 8.t t.J 21 .0 -1.6 20.3
2t.r 26.2 18.98.3 4.6 12.0 1.1 r.7 194 27.3 39.7 26.7 Source : Economic
Survey,2005-06. Factors for Export Growth since 2002-03 Both external and
domestic factors have contributed to the satisfactory performance of exports
since 2002-03. While improved global growth and recovery in world trade
aided the strengthening of Indian exports, firming up of domestic economic
activity, especially in the manufacturing sector, also provided a supporting
base for strong sector-specific exports. Various policy initiatives for export
promotion and market diversification seem to have contributed as well. The
opening up of the economy and corporate restructuring have enhanced the
competitiveness of Indian industry. Infact India's impressive export growth
has exceeded world export growth in most of the years since Foreign
Tiade489 1995; but, since 2003, it has lagged behind the export growth of
developing countries taken together, mainly because of China,s explosive
export growth. India's share in world merchandise exports, after rising from
0.5 per cent in 1990 to 0.8 per cent in 2003, haJbeen stagnating at that level
since then with marginal variation at the second decimal place (Table 23.5).
This is a cause for concern. Foreign Trade Policy (FTP) 2004-2009 envisages
a doubling of India's share in world exports from 0.75 per cent to 1.5 per cent
by 2009. To achieve this target, Indian exports may need to exceed US$ 150
billion by 2009 as world exports are also growing fast. TABLE - 23,5 Export
Growth and Share in World Exports of Selected Countries Percentage Growth
Rate Share in World Exports 1995-01 2003 2004 2005* 2001 2003 2004
2005* Country2004 Value ($ bn) China Hong Kong Malaysia Indonesia
Singapore Thailand India Korea Developing countries World12.4 34.5 3.6 lt.9
6.6 6 5 5.1 5.1 4.t 15.2 5.9 r7 .l 8.s 15.8 7,4 19.3 7.9 18.4 5.5 1s.935.4 15.6
26.5 t1 .2 24.5 20.0 25.1 30.9 27.1 2t.232.1 4.3 5 9 6.6 7.2 593.0 11 4 3. I 3.0
2.9 2.8 259.0 12.1 1.4 1.3 t.4 1.4 r2s.7 44.6 0.9 0.9 0.8 0.8 7 t.3 14 8 2.0 1.9
2.0 2.0 179.6 r2.9 1.1 1.1 1.1 1.1 96.0 2l .0 0.7 0.8 0.8 0.8 7 1 .8 1 8 . 1 2.s 2.6
2.8 2.8 254.0 2t.2 36.8 38.8 40.7 42.4 3685.1 14.9 100.0 100.0 100.0 100.0
9049.8 While high growth in global output and demand, especially in the
major trading partners of India, helped, it was the pick up in domestic
economic activity, especially the consistent near double-digit growth in
manufacturing, that constituted the main driver of the recent export surge. In
2004-05, India's manufacturing exports grew by 2l per cent and had a share of
around 74 per cent in total exports. Further productivity gains in the export
sector require a deepening of domestic reforms, and an accelerated removal of
infrastructureSource: Economic Survey, 2005-06. 490Indian Economl:
Perfornarce ard Paliciet bottlenecks, including export infrastructure.
Infrastructure remains the single most important constraint to export growth.
Achievement of the ambitious export target set in Foreign Trade Policy
(2004-2009) requires a projected augmentation of the installed capacity of
ports by 140 per cent. Indian ports, which handle over 70 per cent of India's
foreign trade even in value terms, have a turnaround time of 3-5 days as
against only 4-6 hours at international ports like Singapore and Hong Kong.
As for internal transport, while there has been a perceptible improvement in
the national highways, secondary roads need to be improved and the issue of
delays caused at inter-state checkpoints need to be addressed. Exporters need
to place more emphasis on non-price factors like product quality, brand
image, packaging, delivery and after-sales service. A more aggressive push to
FDI in export industries will not only increase the rate of investment in the
economy but also infuse new technologies and management practices in these
industries. The strengthening of Indian exports has been aided by positive
trends in global demand, which was also reflected in world trade. After a
sharp downturn in 2001, volume growth of world merchandise trade
rebounded to 3.0 per cent in 2002 and further increased by 4.5 per cent in
2003. According to World Trade Organization (WTO), real merchandise trade
accelerated by nearly l0 per cent in the first half of 2004, and is estimated to
have grown in 2004 by 8'5 per cent, or nearly twice as fast as in the preceding
year. Imports 1. 1950 to early 1970s - The value of imports as a proportion of
GDP at market prices, fluctuated through the 1950s (around 6 to 9.8 per cent)
and thereafter declined slowly till the early 1970s (from 6.8 per cent in
1960-61 to 4.2 per cent in 1972- 73, Table 23.1). The severe foreign exchange
crisis of 1956-57 led to the adoption of strict measures for import controls.
The import licensing system was intensified in the late fifties and early sixties.
After a brief attempt at using fiscal measures instead of physical controls in
mid-sixties, the import licensing was intensified. Import policy became
increasingly restrictive and complex. The quantitative restrictions were used
to provide protection to any domestic activity that substituted for imports' The
decline in public investment and industrial growth after the mid-1960s also
contributed to reducing the pressure on imports' Foreign Trade 49r 2. Early
1970s to late 1980s - After 1972-73, the value of imports as a proportion of
GDP showed a distinct increase. The import needs became stronger as the
industrial growth recovered in mid-seventies and showed an accelerating trend
in the 1980s. The eighties is marked with a clear shift in the trade strategy
towards reduction of quantitative restrictions on imports. The number of items
in the category of OGL-that is, a licence to import but with no quantitative
restrictions- increased substantially in this period. The rise in the value of
imports as a proportion of GDP at market prices is in spite of the sharp
increase in tariffs in eighties. The value of imports as a proportion of GDP
increased from a level of 4.6 per cent (I973-74) to over 6 per cent in the
remaining years of seventies. It was around 8 to 9 per cent in the decade of
eighties (Table 23.1). 3. 19903 - The value of imports as a proportion of GDP
at market prices show a distinct increase in the 1990s except for 1991- 92. The
decline in l99l-92 was due to severe import curbs introduced after the payment
crisis of 1990-91. The value of imports as a proportion of GDP increased from
8.8 per cent in 1990-91 to 12.5 per cent in 1997-98 and 13 per cent in 2000-
01 (Table 23.3). Merchandise imports displayed strong growth in 2OO3-04,
and rose faster than exports. Lower tariffs, a cheaper US dollar and a buoyant
domestic economy boosted imports. Imports, in US dollar terms and on
customs basis, increased by 27.3 per cent in 2OO3-04, on top of a rise of 19.4
per cent in the previous fiscal. Growth in India's merchandise imports in
2004-05 at 40 per cent in dollar terms was the highest since 1980-81. This
surge in growth in 2004-05 was mainly due to the steep rise in price of crude
petroleum and other commodities with value of POL imports increasing by
45.1 per cent. While volume growth in import of POL was subdued at 6.4 per
cent, largely in response to the price increase, larger imports filled the gap
between growing demand and stagnant domestic crude oil production. In
2004-05, lower tariffs, a cheaper US dollar, a buoyant manufacturing sector
and high export growth boosted non-oil imports by 39 per cent, particularly
capital goods, intermediates, raw materials and imports needed for exports.
Buoyant growth of imports of capital goods at 2I per cent, on top of the 40 per
cent growlh in 2003-04, reflected the higher domestic investment and firming
up of manufacturing growth. A significant contributor to the rise in non-POL
492Indiau Ecoronl: Performance ail Policles imports was the 59.6 per cent
growth of gold and silver on the back of a 59.9 per cent growth in 2003-04,
due to the high international gold prices. The duty reduction on imported gold
from Rs.250 to Rs.100 per 10 gram and liberalisation of such imports as per
trade facilitation measures announced in January, 2004 could also have
provided a fillip. Non-oil, non-bullion imports increased by 31 per cent in
2OO4-05, compared to a rise of 28.5 per cent in 2003-04. Unlike in 2003-04,
the surge in POL imports in 2004-05 and 2005- 06 (April-November) was
dominated by the price impact. International crude oil (Brent variety, per
barrel) prices, trending upwards since 2002, on average, rose from US$ 27.6
in 2002-03 to US$ 28.9 in 2003-04, US$ 42.1 in 2004-05, and further to US$
56.64 per barrel in April- November 2005 with a peak of US$ 67.33 on
August 12,2005'The stiffening of global crude oil prices was contributed by a
combination of heightened demand, limited spare capacity and geopolitical
threats to the existing capacity. The surge in crude oil prices has sharpened the
focus on the adverse impact of such volatility on domestic prices and the need
to minimise such impact. Given India's relatively high oil intensity and
increasing dependence on imported crude oil, efforts are being made to
diversify sourcing of such imports away from the geopolitically sensitive
regions. Another development has been the decision to build up strategic oil
reserves, equivalent of about 15 days requirement, to minimise the impact of
crude price volatility in the short term. In a related initiative, India is
coordinating with large oil importing countries in Asia, in exploring
possibilities for evolving an Asian products marker, in place of an Asian
premium, which would reduce the premium paid by Asian countries and thus,
to some extent help in controlling the country's oil import bill. Bulk of the
increase was contributed by growth in non-oil imports, which shot up from
17.0 per cent in2002-03 to 31.5 per cent in2003-04. The acceleration of such
imports was mainly due to higher imports of capital goods, industrial raw
materials and intermediate goods. It reflected the higher domestic demand and
firming up of industrial growth' Factors for Imports Growth Imports continued
to rise at a rate faster than that of exports in the current financial year, rising
by 34.7 per cent in April-January' 2OO4-05 on back of good industrial
performance and rising international crude oil prices. The rise has been
contributed by a continuing robust growth in non-POL imports of 32.7 per
cent and acceleration in POL Foreign Tiede493 India moved one notch up the
rankings in both exports and importsin 2004 to become the 30th leading
merchandise exporter and 23rd leading merchandise importer of the world.
Changing Structure of India,s Foreign Tbade In order to study the structure of
India's foreign trade we have to analyse the changing pattern of imports and
exports. Since the purpose of the import control regime was to confine imports
to essential consumer goods, raw materials, and investment goods needed for
domestic production and exports, it is not surprising that changes in the
commodity composition of India's imports reflected this. For example,
foodgrains and edible oils accounted for about 16 per cent oftotal imports in
1960-61, and about I per cent in lgg0-gl. Imports of gems, which were
negligible in 1960-61, accounted for US $ 2'079 million or nearly 8 per cent of
imports in 1990-91, reflecred the fact that gems and jewellery exports at
$1.667 million comprised nearly a sixth of total exports. The share of crude
petroleum, oils, and lubricants in total imports rose from about 6 per cent in
1960-61 to a high of roughly 40 per cent in 1980-81. However, it fell to about
23 per cent partly on account offall of crude petroleum prices and partly also
to rapid growth of domestic crude output from the Bombay High Field.
Turning to exports, India's share of world exports has fallen steadily from
about 2per cent in 1950 to less than 0.5 per cent in 1990. Since world export
grew rapidly between 1950 and 1973 and somewhat more slowly thereafter,
India's exports grew in absolute terms in spite of a declining share. But the
dramatic fall in share reflects the fact tlat other countries were able to take
greater advantage of growing world trade. The composition of India's exports
has, as expected, shifted moderately away from primary products to
manufactured goods, whose share rose from about 45 pu cent in 1950-5 1 to
79 per cent in 1990- 91. However, primary exports have been virtually
stagnant, and manufactured products have accounted for almost the entire
growth in total exports (Table 23.7). Among manufactured products, just four
items leather, gems, garments, and textiles-accounted for most of the Foreign
Trade495 growth in recent years. In contrast, the export of engineering goods,
which rose by over 20 per cent per year in value terms between 1950- 51 and
1975-76 and between l97O-71 and 1978-79, declined between 1980-81 and
1985-86. The export of gems has grown rapidly since the early 1970s. This
export is heavily dependent, however, on the import of uncut small gems, the
cost of which is determined in large part by the South African monopoly De
Beers. The exports of garments and textiles are governed by India's quotas
under the Multi-Fibre Arrangement (MFA). Bhalla (1989) points out that until
the 1980s, India did not fully use quotas, and India's competitors did better in
quota, as well as, non-quota countries. It is possible that the spurt in India's
garment and textile exports reflects better use of quotas and higher prices
realised on the average. Whether India will be able to compete in the textile
and apparel market in the absence of the MFA is debatable, particularly in
view of the fact that the Indian textile industry has fallen behind
technologically in the past four decades primarily because of the government's
textile policy. During the high-growth phase of India's exports, that is,
between 1993-94 and 1995-96, major export items which had contributed
significantly to the growth process included engineering goods, cotton yarn,
fabrics, chemicals and allied products, rice, coffee, processed fruits, juices and
miscellaneous processed items and marine products. The growth rates of
export of all these items have dropped considerably during 1996-1998.
Among the manufactured exports, the deceleration of growth rate has been
most marked for engineering goods. Within the agricultural and allied
products group, export levels of both rice and coffee declined between
1995-96 and 1997-98.3 Comparison between 90s and 80s For the purpose of
analysis at the aggregate level, India's trade performance during 1992-93 to
1998-99 (referred to here as the nineties) has been compared with that during
1980-81 to 1990-91 (the eighties). The year l99l-92 witnessed considerable
strain on the balance-of- payments. To meet the crisis, severe restrictions were
placed on imports and the Rupee was adjusted downward in July 1991. Being
an exceptional ycal l99I-92 should be excluded in any time series based
analysis of trade developments. The periodisation of the analysis captures the
structural shifts in the growth of exports and imports during 3. Reserve Bank
of India (1997-98). Report on Currency and Finance, Yol. 1 Foreign Trade
497 the sub-periods. For instance, on an average annual basis, export growth
during 1992-93 to 1998-99 at 9.8 per cent was higher than that of 8.2 per cent
registered during 1980-81 to 1990-91. Similarly, the average import growth
observed during the nineties at 12.0 per cent remained substantially higher
than that of 7.8 per cent recorded during the eighties (1980-81 to 1990-91).
The world trade has undergone significant changes since 1996 due to a host of
developments including a sharp fall in international prices for manufactured
products and the emergence of economic crises in certain parts of the world.
In addition, protectionist policies and practices adopted by various
industrialised countries during the recent years and perhaps most importantly
anti-dumping and countervailing measures seriously affected the export
efforts of the developing countries (Stiglitz, 1999). These unfavourable factors
have had their impact on the developing countries including India's trade
performance. In the light of the above factors, it would be appropriate to
examine the trade performance of India during the two sub-periods of the
nineties; the first sub-period covering the first four years following the
introduction of reforms (i.e., 1992-93 to 1995-96) and the second sub- period
consisting of the subsequent three years (i.e., 1996-97 to 1998- 99). During
the first sub-period, on an average basis, India's exports and imports increased
by 15.7 and 17.5 per cent, respectively, which were significantly higher than
the growth rates during the eighties. Broadly in line with the unfavourable
external developments, between 1996-91 and 1998-99, growth in India's
exports and imports, on an average basis, decelerated to 2.0 per cent and 4.5
per cent, respectively. India's share in world exports, which had declined from
0.52 per cent to0.47 per cent between 1984 and 1987, improved to 0.53 per
cent in 1992. Notwithstanding the slowdown in India's export growth since
1996, reflecting the relatively better performance by India yis-ti-yis rest-
of-the-world, its share in global exports reached 0.62 per cent during 1997
(rMF, 1998). Trade GDP Ratio India's trade-GDP ratio showed substantial
improvements during the nineties as compared with the eighties. The
export-GDP ratio declined from 4.9 per cent in 1980-81 to 4.2per cent in
1985-86 and thereafter it gradually improved and reached 6.1 per cent in
1990-91. During the nineties, the ratio reached its highest level at 8.7 per cent
in. 1995-96. The ratio declined, marginally, during the next three years and
was at 498 Irdian Economl: Petlormance and Policiet 8.1 per cent in 1998-99.
On an average basis, export-GDP ratio increased from 5.0 per cent to 8.2 per
cent between the eighties and the nineties. Between these two periods, on an
average basis, India's import- GDP ratio increased from 7.7 per cent to 9.4 per
cent. The noticeable improvements in the export-GDP and import-GDP ratios
point to the increasing openness of India's foreign trade regime to global trade.
TABLE - 23.8 India's Foreign Trade Ratios (Per Cent) Period Average
X/GDP M/GDP T/GDP X/M 3 1980-81 to 1989-90 1990-91 to 1999-00*
1990-91 ro 1994-95* 1995-96 to 1999-00 2000-01 to 2001-024.6 8.0 '7.3 8.5
9.47.2 9.5 8.4 lo.4 10.864.0 84.1 86.9 81.8 86.7I1.8 t7.4 15.7 18.9 20.2 Notes :
* Excluding l99l-92. X =Exports, M-Imports, T=Exports+Imports,
GDP=Gross Domestic Product at cur rent market prices in rupees. Sources :1.
Directorate General of Commercial Intelligence & Statistics. 2. Economic
Szney, (various years) Govemment of India. Ihade Deficit-GDP Ratio Along
with the increase in trade-GDP ratio, there has been a decline in India's trade
deficit-GDP ratio between the two periods. This is borne out by the fact that
the difference between export and import-GDP ratio on an average basis,
declined from 2.7 per cent in the eighties to 1.2 per cent in the nineties. This
indicates that the divergence between export and import performance was
more pronounced during the eighties than in the nineties. Similarly, the
export-import ratio (on an average basis) increased substantially from 65.1 per
cent during the eighties to 87.0 per cent during the nineties reflecting thereby
the increasing alignment between India's export and import performance
during the nineties as compared with the eighties. Foreign Tiade Structural
Change in Exports Changes in Terms of Broad Categories499 Reflecting the
development of a large and diversified industrial sector, during the
post-Independence period, India has gradually transformed from a
predominantly primary product exporting country into an exporter of
manufactured products. In the mid-eighties, manufactured exports accounted
for about two-thirds of India's total exports while the rest comprised of
primary products. During the years preceding the introduction of economic
reforms, i.e., between 1987-88 and l99l-92, while the share of manufactured
goods increased from 67.8 per cent to 73.8 per cent, that of primary products
declined from 26.1 per cent to 23.1 per cent. These trends were reinforced
during the subsequent period (i.e.,1992-93 to 1998-99). On an average basis,
the share of manufactured products increased by 4 percentage points while
that of primary commodities declined by 2 percentage points between the
eighties and the nineties. The share of residual exports including petroleum
products declined almost continuously between 1987-88 and 1998-99. An
analysis of the commodity composition of India's exports shows that the
combined share of the top six export categories, namely, gems and jewellery,
readymade garments, engineering goods, textile yarn, fabrics, made-ups, etc.,
leather and manufactures and chemicals and allied products increased steadily
r^'om 59.4 per cent in 1987-88 to 65.7 per cent it l99l-92. On an average basis,
the combined share of these exports at 66.8 per cent during the period 1992-93
to 1998-99 was 3 percentage points higher than that during the eighties. The
increase in the share of the top six categories of exports in the total exports by
9 per cent between 1987-88 and 1998-99 reflects a rise in the concentration of
India's exports in terms of broad export categories. It may, however, be
mentioned that each of these top export categories consists of a large number
of individual items. Even if the expilrt shares of traditional items within a
broad category decline, the share of the whole product category in total
exports can increase due to appearance of newer products within that group.
The emergence of newer export items, however, indicate export
diversification and in order to get a clear picture about the change in the
concentration of exports, it is essential to examine the issue at a more
disaggregated level. Commodity Camposition: Exports The changes in the
structure of India's exports is more noticeable 500Indian Ecanany:
Perfarttance aud Policies at the disaggregated level. Items that registered
considerable improvements in relative export performance between the
eighties and the nineties include coffee, processed fruits, juices and
miscellaneous processed items, rice, spices, works of art excluding floor
coverings and other items like sugar and mollases and raw cotton (not
elsewhere included). On an average basis, the total export earning from these
six items taken together declined by 2.9 per cent in the eighties, while they
registered an impressive 20.5 per cent growth rate in the nineties. Items, which
have exhibited steady relative export performance through the two periods
include drugs, pharmaceuticals and fine chemicals, other agricultural and
allied items, cotton yarn, fabrics, made-ups, etc. On an average basis, the total
export earning from these three items taken together increased by 16.1 per
cent and 12.8 per cent during the eighties and the nineties, respectively. The
relative export performance of items such as oil meal, hand-made carpets
excluding silk carpets, other ores and minerals and rubber, glass, paints,
enamels and products worsened considerably during the nineties as compared
to the eighties. As against an average growth of 18.1 per cent during the first
period, the average growth rate of export earnings by these four items taken
together decelerated sharply to 6.5 per cent during the nineties. Items which
registered relatively low growth rates during the both periods include cashew,
gems and jewellery, iron ore, leather and manufactures, natural silk yarn,
fabrics, made-ups, etc., petroleum products and tea. The combined export
earnings of these seven items taken together, on an average basis, increased by
6.3 per cent and 6.7 per cent, during the pre-I992 and post-1992 periods,
respectively. The change in the relative performance of individual export
items between the two periods indicates that the change in the structure of
agriculture and allied exports has been more marked than manufactured
exports. Items such as coffee, rice, processed fruits, juices and miscellaneous
processed items remained relatively less important export items during the
eighties. These items, however, can be identified as crucial emerging exports
during the nineties. In terms of average growth rate, these exports had
declined by 3.2 per cent in the eighties, while they increased by an impressive
29.7 per cent in the nineties. The combined share of these three exports in
India's total agricultural and allied exports had declined ftom23.3 per cent in
1987-88 to 15.4 per cent in 1990-91. Their share more than doubled to reach
34.2per cent in 1998-99. Alongside the emergence of newer products, the
relative importance of some of India's traditional agricultural and allied export
items such as cashew, oil meal, tea and tobacco declined considerably Foreign
Tiade501 as between the two periods. On an average, the growth rate of these
exports decelerated from 7.9 per cent in the eighties to 4.2 per cent in the
nineties. More importantly, their combined share in total agricultural and
allied exports, which increased from 38.1 per cent in 1987-88 to 43.6 per cent
in 1989-90, declined sharply to 26.2 per cent in 1998-99. Mov e Towards
Value -addition There are indications that during the nineties, some of the
Indian exports have moved upwards in the value-addition chain whereby
instead of exporting raw materials, the country has switched over to the export
of processed items. For example, while the value of iron ore exports declined,
that of primary and semi-finished iron and steel increased many fold between
the two periods. Reflecting this trend, the share of ores and minerals in total
exports declined, on an average basis, from 5.5 per cent to 3.5 per cent
between the eighties and the nineties. There were also significant
compositional shifts within the major manufactured product groups such as
engineering goods, chemicals and allied products, etc. as between the two
periods. On an average basis, the share of basic chemicals, pharmaceuticals
and cosmetics within the chemicals and allied group, declined from 7 I .4 per
cent to 62.4 per cent between the eighties and the nineties. In particular, the
average export share of cosmetics, toiletries, etc. within this group declined
sharply from 12.4 per cent to 4.7 per cent between these two periods. Within
the same group, the average export share of plastic and linoleum increased
from 6.4 per cent during the eighties to I3.2 per cent in the nineties. Among
the components of engineering goods, the average share of machinery and
equipment in total engineering exports declined from 30.6 per cent to 2I.7 per
cent while that of primary and semi-finished iron and steel increased from 2.9
per cent to 11.9 per cent as between the two periods. Among the textile
products, while the importance of man-made yarn, fabrics, made-ups
increased as between two periods, that of jute manufactures declined sharply.
The internal export composition of leather and leather manufactures and
readymade garments remained stable before and after the initiation of
economic reforms. Moving Away from Traditional Exports Towards New
Manufactured Products India's manufacturing exports are showing tendencies
of shifting away from traditional exports towards relatively new manufactured
products. Another interesting point about the compositional change in the
502Indian Ecozottl: Petfotnance anl Policies manufactured exports is that, by
and large, major export items within the category for which internal
composition remained unchanged between the eighties and the nineties (e.g.,
leather and leather products, ready- made garments) recorded relatively poor
export performance as compared with groups which recorded changes in their
internal composition (e.g., chemicals and allied products, engineering goods).
This indicates the existence of a close link between export performance and
structural change in the case of India's manufactured exports. As mentioned
earlier, since 1996-97 therc has been a marked deceleration in the growth of
India's manufactured exports. Apart from its negative impact on the overall
export growth, a fall in the growth of manufactured exports also likely to have
constrained structural transformation within the category of manufactured
exports. A number of external as well as domestic factors contributed to the
process of slowdown in India's exports in general and manufactured exports in
particular. These included: decline in international manufactured prices,
increased protectionism by the industrialised countries coupled with
non-implementation of the transitional agreements on integration of trade in
textiles and clothing with the WTO by the industrialised countries. While
these factors had adverse implications for Indian manufacturing exports,
particularly exports of engineering goods, chemicals and allied products and
textiles and clothing, the sharp price fluctuation in the international market for
raw diamonds and gold between 1996 and 1998, had contributed to the decline
in gems and jewellery exports, the single largest export item of India. India's
Share in Global Exports: Compositional Change The foregoing discussion
focuses solely on the internal change in the commodity composition of India's
exports. It is also important to study whether there has been any change in
India's share in global trade. It may be noted that commodities for which
India's share in global exports have increased considerably as between the two
periods include rice, coffee and substitutes, feeding stuff for animals, textile
yarn (in particular, cotton yarn), pearls, precious and semi-precious stones and
gold and silver jewellery. Items for which India's global export share declined
as between the two periods include shellfish, tea and mate, spices, iron ore
concentrate, leather, leather manufactures and certain categories of textile and
garment articles. It is interesting to note that during the eighties, there were
many Foreign Trade503 export items for which India's global market shares
were high while growth in world trade for those products was low. It is argued
that lack of alignment between the composition of India's export basket and
the demand structure in foreign markets has been a major constraint for
expansion of India's exports. Reversing such trends, during the nineties, by
and large, India's global shares have improved for those commodities for
which world trade showed relatively high growth potential and India's global
shares declined for those commodities for which growth in world trade
decelerated. In other words, the alignment between the structure of world
demand and the composition of India's exports has improved during the
nineties as compared to the eighties. This is likely to have major impact on the
future behaviour of India's exports. India's export share in world trade has
increased perceptibly during the recent period. India's exports as a percentage
of world exports improved to 0.56 per cent during 199l-1996 and further to
0.65 per cent during 1996-2002 from 0.48 per cent in the 1980s. The ratio was
0.71 per cent in 2000-01, the highest achieved so far since the 1970s.
Nonetheless, India's share in world exports is still very low and appears
unimpressive when compared with the other major trading Asian countries,
such as, China and other East Asian economies like Malaysia, Thailand,
Singapore, Korea and Indonesia (Table 23.9). China demonstrated the most
dramatic change as its share in world exports more than doubled in a decade
from 2.0 per cent in 1991 to 4.4 per cent in 2001. Group-wise, India's share in
the imports of industrialised countries in the 1990s declined as compared to
that in 1986. Inrespect of the developing countries as a group, however, it has
increased from 0.5 per cent in 1986 to 1.1 per cent during 1996-2000. The
Ministry of Commerce and Industry, Government of India has set an export
target of I per cent share of world exports by 2006-07 for the medium-term
which would be co-terminus with the Tenth Five year Plan. This target is
based on historical trends, current prospects and the requirement of a
compound annual growth rate of about 12 per cent for exports till the year
2006-07 (Government of India, 2002a). The export performance is known to
depend on price competitiveness, as well as non-price factors. As regards the
price competitiveness, a number of earlier studies have emphasised that real
exchange rate may be an important variable influencing the price
competitiveness of India's exports. In India, large exchange rate misalignment
has not oCcured in the last one decade as the market itself has corrected the
misalignment gradually over different episodes. 504 Inlian Econanl:
Prfornance and Po/icies TABLE _ 23.9 Share of Select East Asian Countries
in WorldExports (Per Cenr) Country 1995 1999 I99I 2001Average I99r-
1996-1995 2000 India China Indonesia Korea Malaysia Singapore
Thailand0.6 0.6 2.5 3.4 0.9 0.9 3.0 2.5 1.2 1.5 2.0 2.3 1.0 1.00.5 2.0 0.8 2.0 1.0
1.7 0.80.6 2.9 0.9 2.4 1.4 2.3 1.10.6 3.5 0.9 2.6 1.5 2.0 1.00.7 4.0 1.0 2.7 1.6
2.8 1.00.7 4.4 0.9 2.5 t.4 2.0 2.0 Source : Intemational Financial Sratistics,
February 2003. India's export performance is affected by domestic as well as
external impediments. The domestic factors inhibiting India's export growth
are infrastructure constraints, high transactions cost, small-scale industry
reservations, inflexibilities in labour laws, lack of quality consciousness and
constraints in attracting FDI in the export sector. High levels of protection in
relation to other countries also explain why FDI in India has been much more
oriented to the protected domestic market, rather than as a base for exports.
The exports of developing countries like India are facing increasing
difficulties by emerging protectionist sentiments in some sectors in the form
of technical standards, environmental and social concerns besides non-trade
barriers like anti-dumping duties, countervailing duties, safeguard measures
and sanitary and phyto-sanitary measures. Indian products which have been
affected by such barriers include floriculture products, textiles,
pharmaceuticals, marine products and basmatl rice exports to the European
Union and mushroom and steel exports to USA and also grapes, egg products,
gherkins, honey, meat products, milk products, tea, and spices. Differential
tariffs against developing countries have also adversely affected market access
into these countries (Government of India, 2002b; WTO, 2002). According to
the WTO, exporrs from India are currently subject to 40 anti-dumping and l3
countervailing measures mainly for agricultural products, textiles and clothing
products Foreign Trade 505 and chemicals and related products. This brings
into focus the importance of non-price factors like quality, packaging and the
like mentioned earlier, where India still seems to be lacking as compared to
the international standards. This has adversely affected India's export
performance vis-d-vis other developing countries which may have an
improved standing in these non-price factors. Commodity Composition of
Imports In the discussion on the structural change in India's imports in this
sub-section, the relative shares of the major commodities/groups in total
imports should generally be exclusive of gold and silver imports. This has
been done keeping in view the sharp increase in gold and silver imports in the
recent years, which obscures the changes in the relative shares of other items.
The import of gold and silver rose from US $ 4 million in 1990-91 to US $
4,876 million in 1998-99 and formed as much as ll.6 per cent of India's total
imports during that year. The relative share of capital goods in India's total
imports net of gold and silver improved, marginally, from 25.6 per cent during
1987- 9l to 26.0 per cent during 1992-1999. Within the capital goods group,
the rise in import was more pronounced in the case of manufacture of metals,
machine tools, and electrical machinery (including electronic and computer
goods), while that of non-electrical machinery and transport equipment
recorded a relatively low order of increase. While the overall increase in the
import of industrial raw materials and intermediate goods was less
pronounced, certain individual items mainly catering to export activities such
as cashew nuts, textile yarn, fabrics, made-ups etc., and chemicals (organic
and inorganic), however, recorded sharper rise. Among other items, the
imports of petroleum (crude and products) showed wide fluctuations,
reflecting inter alia, the movements in international prices. There was a sharp
increase in its import during 1989-90 (25.2 per cent) and 1990-91 (60.0 per
cent) and the average annual growth rate during 1988-1991 was considerably
higher at27.2 per cent as compared with the 12.0 per cent growth in total
imports. After attaining a high base in 1990-91, the oil imports declined
during 1991-92 by ll.7 per cent. During the period 1992-93 to 1998-99, the
growth rate in oil imports ranged between 33.4 per cent in 1996-97 and a
negative of 21.2 per cent in 1998-99. Although the average annual growth rate
of this item during 1992-1999 was low (4.6 per'cent), the average value at US
$ 7,134 million stood79.2 per cent higher than 506 Indian Econonlt:
Performance and Policiet US $ 3,981 million during 1987-199I.
Consequently, the relative share of oil imports moved vp to 22.5 per cent
during 1992-1999 from 19.4 per cent during 1987-1991. Similarly, the
average level of import of manufactured fertilisers during 1992-1999 also
stood 77 .7 pet cent higher than that during 1987- 1991, although the average
annual growth rate remained considerably lower at 9.5 per cent during
1992-1999 than that of79.5 per cent during 1988-1991. The increase in the
imports of consumption goods was relatively less pronounced (27 .3 per cent),
with its share dropping from 4.3 per cent during 1987-199I to 3.6 per cent
during 1992-1999. Within this category, the import of edible oils, however,
increased by 55.9 per cent and that of sugar increased by 269.3 per cent. The
changes in the structure of India's imports are reflective of the influence of
three factors: (1) movements in international prices; (2) changes in trade
policy; and (3) pattern of domestic demand. The role of international prices in
shaping the trends in the import of petroleum, crude and products has already
been discussed earlier. This apart, it may be indicated that the international
prices of manufactured goods have declined considerably during the recent
years, keeping their import value depressed. The surge in the imports of gold
and silver, edible oils and manufactured fertilisers were to some extent policy
driven. Similarly, reflecting the impact of further easing of the restrictions on
the import of capital goods, these items recorded higher import growth during
1992-1999. Since a sizable part of India's imports cater to the needs of the
industrial sector, the trends in the demand for imports may be judged from the
overall growth in industrial production. Direction of Foreign TFade Prior to
Independence, a large part of India's trade was either directly with Great
Britain or its colonies or allies. This pattern continued for some years after
Independence as well since India had not till then explored the possibilities of
developing trade relations with other countries of the world. For example, the
combined share of UK and USA in India's export earnings was 42 per cent in
1950-5 l. Their share in India's import expenditure was as much as 39.1 per
cent in the Foreign Tiade 507 same year. With other capitalist countries like
France, Germany, Italy, Japan, etc. India either did not have trade relations at
all or they were very insignificant. As political and diplomatic contacts
developed with other countries, economic relations also made a headway.
Thus new vistas for developing trade relations with other countries opened up.
The situation has changed very much since, and now after four and a half
decades of planning, the trading relations exhibit marked changes. The
diversification in trade relations has reduced the vulnerability of the economy
to outside political pressures. In the year 1950-51, the share of UK in India's
imports was 20.8 per cent and that of USA was 18.3 per cent. Thus, the
combined share of these two countries was 39.1 per cent. This reflected the
colonial heritage of the country. Within a decade, the picture started showing
some changes. New trading partners like West Germany, Canada and USSR
emerged. There was a change in the relative position of UK and USA as well,
with the latter pushing down the former to the second place. Excepting a year
or two, USA has continuously maintained the first position thereafter. During
the planning period as a whole, India has obtained maximum imports from
USA, the reason being that India has imported large scale quantities of capital
goods, intermediate products and foodgrains (under P.L.480 agreement) from
that country. With the expansion of trading relations with Japan, West
Germany and USSR, the dependence on the UK declined considerably. Thus
the share of UK in Indian imports declined from 19.4 per cent in 1960-61 to
5.7 per cent in 1997-98. On the other hand, the share of Japan increased from
1.5 per cent in 1950-51 to 5.4 per cent in 1960-61 and further to 7 .5 per cent
in 1990-9 1 . However, thereafter, it decreased in percentage terms to 6.5 per
cent in 1995-96 and 5.2 per cent in 1997-98. Another significant development
was the expansion in trading relations with the socialist countries especially
the erstwhile USSR. Imports from USSR were negligible in 1950-51. In
1960-61 they amounted to a meagre Rs. 16 crore. However, thereafter, they
increased rapidly increasing the share of USSR in India's imports from l.4per
cent in 1960-61 to 6.5 per cent in 1970-71. For a number of years it occupied
the second place after USA. For instance, during 1980-81 to 1983-84, USA
occupied the first place in India's imports and USSR was second. In 1984-85,
the share of USSR was 10.4 per cent and it displaced USA from the first
place. The picture changed thereafter. In 1985-86, USA was first, Japan
second and USSR third. In 1990-91, with a share of l2.l per cent, USA
occupied the first place. It was followed by Germany with a share of 8.0 per
cent (the 508 Indiau Econnl: Perfornarce aul Policiet figure is for unified
Germany). Japan had the third position (share 7.5 per cent). UK and Saudi
Arabia shared the fourth position with a share of 6.7 per cent each, Belgium
had the fifth position (share 6.3 per cent) while USSR had the sixth position
(share 5.9 per cent). With the disintegration of USSR the direction of imports
has now changed markedly. For instance, in 1997-98, USA occupied the first
position in India's imports (share 8.9 per cent), followed by Saudi Arabia
(share 6,2 per cent), Germany (share 6.1 per cent), Belgium (share 6.0 per
cent), Kuwait and UK (share 5.7 pet cent each) in that order. Direction of
Exports As is clear from Table 23.10, OECD group accounts for a major
portion of India's exports. The share of this group in 1960-61 was 66.1 per
cent and in 1997 -98 was 55.7 per cent. Almost 46 per cent of these exports
were accounted for by the EU countries in 1997-98. The OPEC group
accounted for 4.1 per cent of exports in 1960-61 and its share in 1997-98 rose
to 10.0 per cent. Most significant was the rapid increase in exports to the
countries of Eastern Europe particularly USSR For instance, Eastern Europe
accounted for 7.0 per cent of export earnings in 1960-61 and its share shot up
to 22.1per cent in 1980-81. During recent years, exports to this group have
suffered a setback due to marked political upheavals in these countries and the
disintegration of the USSR. In 1997-98 the share of Eastern Europe in total
exports had slumped to a mere 3.1 per cent. Developing nations of Africa,
Asia and Latin America accounted for more than one-fourth of India's export
earnings in 1997-98. Most important in this group have been the countries of
Asia. In fact, exports to Asian countries accounted for 21.3 per cent of India's
total export earnings in 1997-98. Thus, countries of Asia now account for
more than one-fourth of India's export earnlngs. Direction of exports in
1999-2000 show significant increases in India's exports to its major
destinations like OECD, Asia and OPEC regions. Exports in US Dollar value,
grew by 12.8 per cent to OECD, 20.1 per cent to Asia (other than OPEC
countries) ar,d I2.3 per cent to OPEC in 1999-2000 as compared with declines
of 1.5 per cent,l4.4 per cent and low growth of 0.8 per cent respectively in
1998-99. Other regions recording robust growth in exports included Eastern
Europe (due mainly to turnaround in exports to Russia) and Latin America
and Carribbean region with Mexico, Peru, Chile, Barbados and Panama
accounting for major increases. Exports to developing countries in Africa,
however, declined by 5.4 per cent in 1999-00 as against a rise 510Indian
Ecoroml: Perlornance ad Policiet of 9.9 per cent in the previous year. In terms
of region-wise share in total exports, while the share of OECD, OPEC and
developing countries from Africa declined in 1999-2000, those of Eastern
Europe and Asian developing countries from Africa declined in 1999-2000,
those of Eastern Europe and Asian developing countries increased during this
period. The share of developing countries from the Latin America and
Carribean region was, however, maintained at 1.7 per cent. Although the share
in total exports to OECD countries, as a group, registered a marginal decline
from 57.8 per cent in 1998-99 to 57 .6 per cent in 1999-2000, exports to many
developed countries like Canada (25.8 per cent), UK (21.I pu cent), USA
(18.5 per cent), Netherlands (16.1 per cent), France (10.9 per cent) and
Belgium (7.2 per cent), in this region recorded [Link] increases during the
year. The share rise in share of exports to developing countries of Asia was
largely on account of the recovery from the crisis by East Asian countries as a
result of which the share of our exports to selected East Asian countries
rebounded from 11.6 per cent in 1998-99 to 13.7 per cent in 1999-2000.
Direction of Imports Sources of imports reveal a sharp decline in share of
imports in total imports from OECD countries from 51.6 per cent in 1998-99
to 44.8 per cent in 1999-2000 as imports from these countries declined by
3.2pu cent in 1999-2000. Bulk of this decline in share was appropriated by
imports from the OPEC region whose share rose to 23.8 per cent in 1999-00
(as compared to 18.3 per cent in 1998-99) mainly because of increase in
international petroleum crude oil prices. Similarly, the share of imports
sourced from non-OPEC developing countries (of Africa, Asia and Latin
America and Carribbean) improved from 21.1 per cent in 1998-99 to 22.6 per
cent in 1999-2000. The share of imports from Eastern Europe was broadly
maintained in 1999-2000 due mainly to recovery in imports from Russia.
Imports from developing countries of Africa and Latin America and
Carribbean regions grew by 21.9 per cent afi,20.3 per cent respectively in
1999-2000 and was contributed among others, by countries like Egypt, Ghana,
Brazil, Chile and South Africa. Imports from developing countries from Asia
also recorded a high increase of 18.5 per cent with robust growth from
countries like China, Hong Kong, Malaysia and Thailand. The share of
selected East Asian countries in total imports increased from 14.9 per cent in
1998-99 to 15.5 per cent in 1999-2000 due partly to the share depreciation of
currencies of these countries during the Asian crisis. Foreign Trade 5tt A
sharp increase in imports from other residual destinations, coupled with
decline in share of OPEC region, may suggest a change in sourcing of oil
imports away from the OPEC region during the current financial year.
Structural changes are also discernible from the data on sources of India's
imports. While there has been a sharp increase in the relative share of the
developing countries, that of the industrialised countries declined. Between
1987-1991 and 1992-1999, the relative share of the developing countries as a
group moved up from 18.0 per cent to 23.0 per cent. This was largely on
account of the increase in the imports from the newly industrialised countries
in South East Asia. Among the commodities that contributed to the import
growth, petroleum (crude and products) from Malaysia and Singapore,
vegetable oils from Malaysia, chemicals from Republic of Korea and
Singapore, and electronic goods from Hong Kong, Republic of Korea,
Malaysia and Thailand were prominent. Between the two periods, the relative
shares of the countries belonging to the OPEC group also increased from 14.5
per cent to 2l .9 per cent. This is mainly reflective of the surge in the oil
import bill on account of higher prices. The share of the OECD as a group in
India's imports dropped considerably from 59.4 per cent during 1987-199I to
52.1 per cent during 1992-1999. Within this group, the relative share of the
EU countries fell from 31.8 per cent during 1987-199I to 26.9 per cent during
1992-1999. The import shares of some of the individual EU countries such as
Denmark, Greece, Ireland and Italy, however, recorded relatively high
growth, while those from traditionally important countries such as Germany,
Netherlands, Sweden and UK showed lower rise. The relative share of the UK
fell to 5.8 per cent during 1992-1999 from 7.9 per cent during 1987-199I.
Among other OECD countries, the imports from Australia, New Zealand and
Switzerland recorded relatively large growth. The relative share of
Switzerland moved up from 1.1 per cent during 1987-I99I to 4.0 per cent
during 1992-1999. This was largely on account of the import of gold and
silver and non-electrical machinery. It may be indicated that during
1992-1999, the import of gold and silver formed as much as 69.2 per cent of
India's total import from Switzerland, while Switzerland along accounted for
58.1 per cent of India's total import of gold and silver during this period. The
relative share of the East European countries declined from 8.1 per cant during
1987-1991 to just 2.9 per cent during 1992-1999 with absolute decline in the
imports from most of the countries belonging to this group. 5r2 Itdian
Etauantlt Perlotaunu and policies Summing Up Notwithstanding the earlier
policy initiatives aimed atliberalisation of India's foreign trade, the
outward-looking trade policy measures announced in lggl marks the initiation
of a new era inIndia's foreign trade. India's foreign trade performance
improvedsignificantly during the recent years and there has been a perceptible
change in the structure of India's foreign trade between the eighties andthe
nineties. The share of manufactured products has increased in India's
totalexports' At the same time, since the introduction of reforms,
theproportions of high-value and differentiated products have increased
inIndia's export basket. Along with the increase in India's aggrelate share in
world trade,the alignment between the country's export basket and world
demand has increased during the nineties. The relative share of certain capital
goods in India's totar imports has also increased in this period. Imports of
manufactured fertilizers and edible oils also recorded higher growth during the
post-1991 period. . In line with the policy changes, imports of gold and silver
have increased sharply during the nineties. Reflecting the increased link
between exports and imports, the shares of certain export-related imports have
also increased iuring therecent years. The most remarkable change in the
country-wise composition ofIndia's exports and imports since 1991 has been
the increase in the shareof developing countries in India's overall trade. while
the share of the East European countries has declined inIndia's total trade, that
of the oECD countries has declined in the caseof imports. India's foreign trade
has, however, been adversely affected bycertain unfavourable external
developments since 1996. Notwithstanding these negative developments,
India's tradeperformance during the nineties as a whole has been better than
thatduring the eighties. Foreign Trade 5r3 BALANCE OF TRADE Balance of
Trade, simply defined is, the difference between the value of export of goods
and the value of import of goods or more generally between exports and
imports or (X - M) where X denotes value of exports and M, value of imports.
When value of exports is more than value of imports (i.e., X > M) balance of
trade (BoT) is said to be favourable or positive. On the other hand when
exports are less than imports (X < M) or imports more than exports (M > X),
the balance of trade (BoT) is said to be unfavourable, or negative or there is
said to be a deficit in the balance of trade. Since goods are also called
merchandise, the balance of trade or trade balance is also called balance of
merchandise account. India's Balance of Trade Ever since the beginning of
planning era in 1951, India has continued to suffer from an unfavourable
balance of trade. The only exceptions to this trend have been the years
1972-73 and I976-77 when the country had a positive trade balance of Rs. 104
crore and Rs. 68 crore, respectively. In the early years after Independence, the
value of India's exports as well as imports were low and the difference
between them was small. This resulted in comparatively lower magnitude of
deficit in trade balance. From Rs. 163 crore average annual deficit it rose to an
annual average of Rs. 36,363 crore during 1997 and [Link] early years of
Tenth Plan; it was Rs. 42,069 crore in 2002-03 which increased to Rs. 62,870
crore in 2003-04. Thus, the trade deficit has not only persisted since 1951 but
has increased widely over the years to reach alarming levels by the end of the
century as is shown in Table 23.11. Causes of Unfavourable Balance of Trade
Continued excess of imports over exports has perpetuated the unfavourable
balance of trade since 1950-51. To begin with, the trade deficit was small, but
it widened over time, more particularly from the Sixth Plan onwards, it rose
sharply to assume serious dimensions during and after the Eighth Five-Year
Plan. This has happened because exports from India have not been able to
keep pace with the high growth rate of rmports. 514 hdian Econal: Perlornaue
and Policiet TABLE - 23.11 India's Baiance of Trade Arerage Annual Exports
Imports First Plan 605 606 '753 I,238 1,8 10 4,728 6,418 8,967 1.'7,382
38,297 86,557 1,68,400 2,55,r37 2,93,367 3,61,879 t_91 829735 973 r,240
1,998 1,973 5,53 8 9,t43 t4,683 25,112 45,52s 97,609 2,04,763 2,97,206 3,5
9,108 4,90,532 4,25,667- 130 -36'7 -48'1 -760 -t63 -8 l0 _) 7)\ -s,7 t6 -7,730
-7,278 -1t ,352 -36,363 -42,069 -65,7 41 -r,28,653 1,31,937Third Plan
(1961-66) Annual Plans (1966-69) Fourth Plan (1969-74) Fifth Plan
(1974-79) Annual Plans (1979-80) Sixth Plan (1980-85) Seventh Plan
(1985-90) Annual Plans (1991-92) Eighth Plan (1992-97) Ninth Plan (199'7
-02) Tenth Plan (2002-07) (2002-03) (2003-04) ' (2004-05) (2005-06)
(Apr.-Dec.) Soarce : Compiled fron Economic Survey, 2003-2004, 2005-06.
Large Increase in Imports In terms of value, India's imports have increased
sharply between 1950-51 and 2005-06 from a level of Rs. 608 crore to
estimated Rs. 4,90,532 cror'e in 2004-05. Some of the factors that have
contributed to this massive import growth are as below: (i) Large Increase in
Developmental Imports: Under planned economic development of the country
starting with the First Plan, there has been a continuous expansion in imports
of capital goods, machinery equipment, etc. The value of capital goods
imports (including transport equipment) increased from Rs. 366 crore in
1960-61 to Rs. 1,910 crore in 1980-81, Rs. 10,486 crore in 1990-91 and Rs.
63,I75 crore in 2004- 2005. Similarly there was increase in raw materials and
maintenance( I 9s6-6 l) Foreign Trade 5lj imports such as equipment needed
to replace the worn-out machinery and maintain it in working order. (ii) Large
Increase in Import of Petroleum: Petroleum, oils and lubricants (POL) have
registered more than 5OO-fold increase between 1960-61 and 1991 as the
value of POL imports increased frorn Rs. 69 crore to Rs. 10,816 crore, which
further rose to Rs. 1,34,094 crore in 2004-05. Petroleum is a major source of
energy used in industry and in surface as well as air transport. It is also used
for domestic fuel in the form of kerosene and cooking gas. Personal
transportation modes comprising motor cars and scooters, motorcycles, etc.,
depend on petroleum. Petroleum is also used in industry as raw material for
many synthetic products. Therefore, a massive increase in demand for and
import of POL is thus inevitable. (iii) Fertiliser Imports: In spite of increased
domestic production, fertilisers are imported to meet their fast growing
consumption requirements. Thus, between 1960-61 and 2000-01, import of
fertilisers has gone up from Rs. 13 crore to Rs. 3,034 crore in 2000-01 and Rs.
5,143 crore in 2004-05. (iv) Import of Pearls and Precious Stones: The import
of unfinished and finished/worked precious and semi-precious stones has
increased from Rs. I crore in 1960-61 to Rs. 42,336 crore in2OO4- 05. Modest
Growth in Exports Growth of exports was quite low and insignificant till the
Third Five-Year Plan. The total value of exports increased from Rs. 642 crore
in 1960-61 to Rs. 32,553 in 1991, Rs. 2,03,571 in 2000-01 and Rs. 3,61,879 in
2004-05. Both external and internal factors are responsible for this modest
growth. External Factors (i) Low World Demand: The world demand for
many goods has remained low due to continuing recession and economic
downturn in many countries. (ii) Low fncome and Price Elasticity of Goods
Exported: Many of the goods exported by India are primary products such as
cereal preparations, fish and marine products, etc. The demand for these goods
is generally less elastic, i.e., the demand does not change'much with change in
income or prices. Thus, when we make efforts to sell more 5t6Indian
Econony: Performaue ad Policiet and increase supply, prices fall but demand
does not increase much. Hence, we end up earning lower value even for larger
quantity sold and our export earnings either do not increase much or
sometimes may even decline. (iii) Import Restriction on Our Goods Entering
Foreign Countries: Many countries have imposed restrictions on goods
imported by them and this adversely affects our exports. These restrictions
may be in the form of quotas, (not more than a certain given quantity of a
given product is to be imported from outside), tariff restrictions (imposition of
import duty on goods entering the country and thus making them costlier for
purchasers in the home market of the importing country) or non-tariff
restrictions such as health laws that do not permit import of agricultural goods
from underdeveloped countries in USA and some other countries on grounds
of posing health hazard to the people. Such physical restrictions and tariff as
well as non-tariff barriers by USA and countries of European Union have
contributed to slow growth of exports from India. (iv) Disintegration of the
Soviet Union: The Soviet Union/USSR was among our largest trading
partners and a big market for Indian goods. Its disintegration caused a major
setback to our exports. Internal Factors (i) Increasing Domestic Demand:
Increase in income of people due to growth of the economy has contributed to
higher domestic demand. The supply side has however not been able to match
this increased demand due to slow growth in agricultural and industrial output.
Not much is thus left for exports as producers sell bulk of output at home quite
profitably. This reduction in surplus of goods (over domestic consumption)
for exports has contributed to their slow growth. (ii) Low Quality and High
Cost of Production: India emerged as high cost low quality production country
which could not face foreign competition either at home or abroad. Hence,
Indian goods were not favoured by foreign buyers and, therefore, our exports
remained low. Measures to Cowect Deficit in Balance of Trade The
Government of India has been adopting and implementing various policies for
restricting imports and promoting exports to reduce trade deficit. Foreign
Trad.e 5t7 Restrictions on Imports Following measures have been taken to
regulate imports: (i) Licensing of Imports: For quite a long time, the import of
non- essential consumer goods was not permitted while the importers of
capital goods essential for country's delvelopment were given import licences.
However, now under the liberalised trade policy, licensing requirements for
most of the goods have been abolished; only a small negative list of import
items remains under licensing system. (ii) Tariff Restrictions: For the goods
that are permitted to be imported under licence from the government, further
restrictions are imposed by way of custom duties or import duties also called
import tariffs. This means a tax is imposed on the goods which arrive at the
Indian ports and thus the price of such goods becomes higher for the Indian
buyers. The higher the rate of custom duty, the greater is the price that Indian
buyers need to pay for imported goods. These high prices of imported goods
are expected to reduce their demand in the domestic market and thereby to
restrict imports. (iii) Quantitative Restrictions: The government may
determine the total import quota of goods, i.e., the total amount of goods that
can be imported and allot this quota to various importers. Nothing beyond the
quota is allowed to be imported. This naturally limits the quantity of imports.
However, under an agreement with the World Trade Organization (WTO),
such quantitative restrictions have been removed on many goods, while for
others they are to be removed in near future. Export Promotion With the
continuing large deficits in India's balance of trade and limited scope for
imports reduction, the only long-term solution to the problem lies in
promotion of exports to earn sufficient foreign exchange to pay for our
growing imports. Export promotion measures opening up wider international
market for our entrepreneurs will stimulate industrial development in the
country under the incentive of larger world demand for our goods. Export
Promotion Measures The export promotion measures adopted by the
Government of India include monetary and non-monetary incentives, fiscal
reliefs, credit facilities, establishment of institutions to help exporters as well
as strict quality controls and inspection of goods meant from export. Some of
the major steps in this direction are as below: 518 Indian Econonl: Perfornaut
aild [Link] (i) Devaluatio: In July 1991, the rupee was devalued by about 20
per cent in terms of major world currencies. This was expected to cheapen our
goods to foreign buyers thereby encouraging our exports. (ii) Cash Assistance:
Under this scheme cash assistance is given to exporters to compensate them
for indirect taxes (e.g., custom duties) levied on the imported inputs that are
used in production of goods for exports. (iii) Income Tax Concessions:
Income from exports is given several concessions under the income tax laws.
For example profits from exports are totally exempted from income tax. (iv)
Import Concessions: Several concessions in imports of machinery, equipment
and technology are given to export production units. Export oriented units are
allowed duty free imports of machines, raw materials and technology.
Exporters are also allocated foreign exchange for import of raw materials used
in production of export goods. (v) Concessional Bank Credit to Exporters :
For financing production meant for exports and also for financing exports
themselves, banks give credit to exporters at concessional terms. (vi) Import
Licences to Exporters: Since imported goods fetched very high prices in the
domestic market as their imports were highly restricted, the exporters were
granted licences for import of goods up to a certain percentage of value of
goods exported by them. This was expected to provide added incentive for
exports. (vii) Issue of Exim scrips: The system of granting import licences to
exporters was later replaced by exim scrips. The exporters were given exim
scrips equivalent to 30 per cent of value of their exports. These exim scrips
could be used to import alarge variety of items. The exim scrips could also be
sold in the market. Since these enjoyed a premium, the exporters could make
additional profits from their sale. This could act as a great incentive to
exporters. (viii) Convertibility of the Rupee: The system of exim scrips was
also replaced by partial convertibility of rupee in March 1992. Under this
scheme, exporters, who earlier had to surrender their entire foreign exchange
earnings to the Reserve Bank of India (RBI) at a rate fixed by it, were now
obliged to sell only 40 per cent of their exchange earnings at the official rate
to the RBI. The rest they were free to sell in the market at the market
determined rate, which was obviously higher Foreign Tiade 5r9 than the
official rate. This indeed was a great liberalisation measure and a bigger
incentive. In March 1997 even this was replaced by a system of full
convertibility of rupee on the trade account. (ix) System ofAdvanced
Licensing: Exporters are given advance licences for duty free import of goods
used in production of export items. (x) Relaxation of Controls on Exports and
Simplification of Procedures: Controls on exports have been relaxed. Exports
of many items have been decontrolled while export procedures and formalities
have been simplified. (xi) Export Processing Zones: Many export processing
zones have been set up. The units operating there are allowed free trade with
other countries. They also enjoy various concessions like five-year tax
holiday. (xii) Export Promotion Organisations: Some such organisations are
Export Advisory Council, Export Promotion Councils, Directorate of Export
Promotion, etc. (xiii) Export Import Bank: The EXIM Bank provides financial
services to exporters and importers and coordinates the work of other
institutions engaged in financing export trade. It pays special attention to
export of capital goods. .ffi. "f"W/ffi # tuffi Balance of Payments and Trade
Policy Concepts BALANCE of payments (BoP) is a systematic record of all
economic transactions between the residents of a country and the rest of the
world. Like all double-entry book keeping accounts it always balances i.e.,
Sum of credit entries = Sum of debit entries. There are two types of accounts
in BoP, namely, (i) Current Account and (ii) Capital Account. Current
Account records transfers of goods and services i.e., merchandise trade and
net invisibles which includes services like travel, transportation, insurance,
etc. and transfer payments. Capital Account shows transfers of claims to
money or titles to investment between a country and the rest of the world. It
includes foreign investment inflow minus the foreign investment outflow,
loans including external assistance and external commercial borrowings
(inflow - outflow) and other capital which includes rupee debt service, IMF
transactions and SDR allocation. A current account deficit is financed through
net inflow of capital on the capital account and the change in the
Government's foreign exchange reserve position. Tfade Policy: An Overviewl
As we embarked on a period of planning, during the fifties, import
substitution came to constitute a major element of India's trade and 1. This
section draws from C. Rangarajan's paper, India's Balance of Payments: The
Emerging Dimensions, in Uma Kapila (ed,), Indian Econorny Since
Independence 2O0O-01 edition, Academic Foundation, New Delhi. 522Indian
Ecoronl: Petfarnarce and Po/iciet industrial policies. Planners more or less
chose to ignore the option of foreign trade as an engine of India's economic
growth. This was primarily due to the highly pessimistic view taken on the
potential for export earnings. A further impetus to the inward orientation was
provided by the existence of a vast domestic market. In retrospect, it is now
abundantly clear that the policy-makers not only under-estimated the export
possibilities but also the import intensity of the import substitution process
itself. It has been as a consequence that India's share oftotal world exports
declined from 1.91 per cent in 1950 to about 0.53 per cent in 1992. The
inward looking industrialisation process did result in high rates of industrial
growth between 1956 and 1966. However, several weaknesses of such a
process of industrialisation soon became evident, as inefficiencies crept into
the system and the economy turned into an increasingly 'high-cost' one. Over a
period of time this led to a 'technological lag' and also resulted in poor export
performance. In the meantime, some change in the attitude towards exports
became perceptible. Several export promotion measures were put in place
from the early 1960s. The 1966 devaluation, while not resulting in the
expected improvement in trade deficit due to a combination of circumstances,
brought out the problems stemming from an overvalued exchange rate.
Nevertheless, it will be correct to say that until the end of the 1970s, exports
were primarily regarded as a source of foreign exchange rather than as an
efficient means of allocating resources. Import substitution over a wide area
remained the basic premise of the development strategy. The Political
Economy of the Foreign Exchange Regimes The political economy of India's
foreign trade and exchange control regimes before reforms were initiated in
1991 can be understood from the implications of its selective, discretionary,
and non-market-oriented character. First, macroeconomic instruments,
including most importantly the exchange rate of the rupee, were never used to
address balance of payments problems except for the rupee devaluation of
1966. Given that QRs on imports were substantially below market demand,
the domestic price of an imported commodity far exceeded its landed cost
inclusive of tariff duties and other taxes. As such there were rents associated
with a licence to import. It hardly requires much imagination to realise that if
rents could be created and allocated, individuals and groups would spend
resources in influencing their creation and allocation in their favour. Balance
of Payments and Trade policy 523 except consumer goods. It was recognised
that trade, exchange rate andindustrial policies must form part of an integrated
policy frinework ifthe aim was to improve the productivity and efficiency oi
the economic system. Trade Policy since l99l 524Indian Econon5,:
PetJbrnance and Policiet in other spheres of the economy. The devaluation of
the Rupee in July 1991 and the transition to the market-based exchange rate
regime deserve mention in this regard. These measures were aimed at
enhancing the price competitiveness of exports. The policies governing
foreign investment and foreign collaboration also have undergone significant
change, which have a bearing on trade performance. Apart from unilateral
measures, the liberalisation of India's trade policies also reflects the
multilateral commitments of the country to the World Trade Organization
(WTO). The focus of these reforms has been on liberalisation, openness,
transparency and globalisation with a basic thrust on outward orientation
focusing on export promotion activity and improving competitiveness of
Indian industry to meet global market requirements. In early 2002, the
Government presented a Medium-Term Export Strategy (MTES) for
2002-2007 providing a vision for creating a stable policy environment with
indicative sector-wise targets, with a mission to achieve one per cent of global
trade by 200'[Link] new Export and Import (EXIM) Policy framed for the
period 2002-2007 and unveiled on 31 March, 2OO2 also seeks to usher in an
environment free of restrictions and controls (Box 24.1). Synergy between
these policies/strategies is expected to realise India's strong export potential
and enhance the overall competitiveness of its exports. BO){ - 24.1 Export
Import (EXIM) Policy 2002-2007 The Special Economic Zone (SEZ) scheme
has been strengthened by permitting the setting up of offshore Banking Units,
hedging of commodity price risks and sourcing of short-term External
Commercial Borrowings. Supplies by domestic units to SEZs would entitle
the former to avail of Duty Entitlement Passbook Scheme benefit. The policy
has also ensured procedural simplification in the process of subcontracting
carried out by the SEZ units. To ease the power situation in and around the
SEZs, units for generation and distribution of power have been permitted to be
set up in the SEZs. The Policy gives a major thrust to agricultural exports by
removing export restrictions on designated items. The efforts to promote
exports of agro and agro-based products in the floriculture and horticulture
sector have been sustained with the notification of 32 Agri-Export Zones
across the country. Non-actionable subsidies such as transport Contd. Balance
of Palment: and Tiade Poticl . Contd525 subsidy have been provided for the
export of fruits, vegetables, floriculture, poultry and dairy products. A1l
Quantitative restrictions on exports (except a few sensitive items) have been
removed with only a few items being retained for export through State
Trading Enterprises. To improve the productivity and export competitiveness
of small-scale, cottage and handicrafts sector, the Policy provides a package
of incentives, including exemption from maintaining the average export
obligation under the Export Promotion Capital Goods (EPCG) scheme,
permission to achieve a lower threshold level for achieving the Export House
status, preferential access to Market Access Initiative funds and duty free
access to trimming and embellishment for achieving value added exports. The
towns of export excellence (such as Tirupur for hosiery, Panipat for woolen
blanket and Ludhiana for woolen knitwear) are intended to be regional rural
motors of economic development for the small scale sector, focusing on
plugging critical infrastructural bottlenecks and enhancing quality of support
services for industrial development. To provide the necessary impetus to star
achievers, EXIM Policy provides a strategic package for status holders
comprising new/special facilities like issuance of Licence on self-declaration
basis, fixation of input-output norms on priority, exemption from compulsory
negotiation of documents through banks, cent per cent retention of foreign
exchange in Exchange Earners' Foreign Currency account, enhancement in
normal repatriation period from 180 days to 360 days and not mandating
exports in each of the three licensing years for achieving the status. The Policy
has operationalised the procedure for duty free import of fuel under the
Advance Licensing Scheme, provided the licence holder has a captive power
plant. In view of phasing out of all restrictions on textile products by 2005
under the Agreement on Textile and Clothing (ATC), the EXIM Policy has
focused on measures to encourage value added exports in the garment sector.
Electronic Hardware Technology Park (EHTP) scheme has been modified to
enable hardware sector to face the zero duty regime under Information
Technology Agreement (ITA-1), mandating only a positive net foreign
exchange as a percentage of exports criteria and obviating any other export
obligation for units in Electronic Hardware Technology Parks. The changes
carried out in the gems & jewellery scheme include abolition of the licensing
regime for the import of rough diamonds, reduction in the value addition
[Link] for export of jewellery and permitting personal carriage of jewellery.
Contd. 526Itdian Econanl,: PetJbrnance tnl Palides The medium-term Policy
continues with all the duty exemption/ remission schemes, along with existing
dispensation of not having any value caps. Procedural simplifications
introduced in the policy include abolition of DEEC Book and withdrawal of
Annual Advance License under the Advance License scheme, dispensation
with technical characteristics for audit purposes under the Duty Free
Replenishment Certificate scheme, 12 years export obligation period with 5
years moratorium for Export Promotion Capital Goods licenses of Rs.100
crore or more and supplies under deemed exports to be eligible for export
obligation fulfilment along with deemed export benefits. Procedural
simplifications have been made in the EXIM policy to further reduce
transaction costs covering Directorate General of Foreign Trade, customs and
banks. These include adoption of 8 digit commodity classification for imports
which would eliminate the classification disputes, reduction of maximum fee
limit for electronic filing from Rs.l.5 lakh to Rs.l lakh, introduction of same
day licensing, new norms for reduction in percentage of physical examination
of export cargo, introduction of the simplified brand rate of drawback scheme
and permitting direct negotiation of export documents. Other salient features
of the EXIM Policy 2002-2007 include: widening of the scope of the Market
Access Initiative scheme to include activities considered necessary for a
focused market promotion of exports, setting up of 'Business Centre' in India
missions abroad for visiting Indian exporters/businessmen for ensuring a
facilitatory environment for exporters, transport subsidy for exports to units
located in North East, Sikkim and J&K; and introduction of Focus Africa with
Focus CIS to follow, to diversify markets. Trade policy reforms in the recent
past, with their focus on liberalisation, openness, transparency and
globalisation, have provided an export friendly environment with simplified
procedures for trade facilitation. Such continued trade promotion and trade
facilitation efforts of the Government have also aided the current
strengthening of export growth. The Union Budget 2004-05 reiterated the
policy approach of lowering customs duties in a measured way to align India's
tariff structure to those of ASEAN countries. It underlined the need for a
special fiscal and regulatory regime for the Special Economic Zones (SEZs),
given their role as growth engines that can boost manufacturing, exports and
employment. Towards this, a Bill for regulating SEZs, to make India a major
hub for manufacturing and exports, is proposed. Other proposals announced in
the Budget included: identification of another 85 items to be taken out
Balance of Pdymentt and Trade Policy527 from the SSI reservation list to
provide space to these units to grow into medium enterprises; proposal to set
up a Fund for regeneration of traditional employment generating industries
(like coir, handloom, handicrafts, sericulture, leather, pottery and other
cottage industries) for development of their export potential; abolition of the
mandatory Cenvat duty regime and introduction of a new tax regime for the
textile sector to make the sector more efficient and competitive; and a
proposal to set up a National Manufacturing Competitiveness Council as a
continuing forum for policy dialogue to energise and sustain the growth of
manufacturing industries and to enhance competitiveness in the
manufacturing sector. Various trade facilitation measures announced in the
review of credit policy by the RBI in October 2004 included liberalisation of
guarantee by Authorised Dealers (ADs) for trade credit, relaxation of time
limit for export realisation for Export Oriented Units (EOUs). Government
also announced, on August 31,2004, a new Foreign Trade Policy for the
period 2004-2009, replacing the hitherto nomenclature of EXIM Policy by
Foreign Trade Policy (FTp). A vigorous export-led growth strategy of
doubling India's share in global merchandise trade in the next five years, with
a focus on the sectors having prospects for export expansion and potential for
employment generation, constitute the main plank of the Policy (Box 24.2).
These measures are expected to enhance international competitiveness and aid
in further increasing the acceptability of Indian exports. BOX - 24.2
Highlights of Foreign TFade Policy 2004-2009 Objectives and Strategy The
new Foreign Trade Policy (FTP) takes an integrated view of the overall
development of India's foreign trade and essentially provides a roadmap for
the development of this sector. It is built around two major objectives of
doubling India's share of global merchandise trade by 2009 and using trade
policy as an efflective instrument of economic growth with a thrust on
employment generation. Key strategies to achieve these objectives, inter alia,
include: unshackling of controls and creating an atmosphere of trust and
transparency; simplifying procedures and bringing down transaction costs;
neutralizing incidence of all levies on inputs used in export products;
facilitating development of India as a global hub for manufacturing, trading
and services; identifying and nurturing special focus areas to generate
additional employment opportunities, Contd. 52E CotrtdInlian Ecarunty:
Pclbrnance and Po/iciet particularly in semi-urban and rural areas; facilitating
technological and infrastructural upgradation of the Indian economy,
especially through import of capital goods and equipment; avoiding inverted
duty structure and ensuring that domestic sectors are not disadvantaged in
trade agreements; upgrading the infrastructure network related to the entire
foreign trade chain to international standards; revitalising the Board of Trade
by redefining its role and inducting into it experts on trade policy; and
activating Indian Embassies as key players in the export strategy. Special
Focus Initiatives The FTP 2004 has identified certain thrust sectors having
prospects for export expansion and potential for employment generation.
These thrust sectors include agriculture, handlooms and handicrafts, gems &
jewellery and leather and footwear sectors. Sector specific policy initiative for
the thrust sectors include, for agriculture sector, introduction of a new scheme
called Vishesh Krishi Upaj Yojana (Special Agricultural Produce Scheme) to
boost exports of fruits, vegetables, flowers, minor forest produce and their
value added products. Under the scheme, exports of these products qualify for
duty free credit entitlement (5 per cent of f.o.b value of exports) for importing
inputs and other goods. Other components for agriculture sector include duty
free import of capital goods under Export Promotion Capital Goods (EPCG)
scheme, permitting the installation of capital goods imported under EPCG for
agriculture anywhere in the Agri-Export Zone (AEZ), utilising funds from the
Assistance to States for Infrastructure Development of Exports (ASIDE)
scheme for development of AEZs, liberalisation of import of seeds, bulbs,
tubers and planting material, and liberalisation of the export of plant portions,
derivatives and extracts to promote export of medicinal plants and herbal
products. The special focus initiative for handlooms and handicraft sectors
include extension of facilities like enhancing (to 5 per cent of f.o.b value of
exports) duty free import of trimmings and embellishments for handlooms and
handicrafts, exemption of samples from countervailing duty (CVD),
authorising Handicraft Export Promotion Council to import trimmings,
embellishments and samples for small manufacturers, and establishment of a
new Handicraft Special Economic Zone. Balance of Paymertt and Tratl-e
Policy529 Contd Major policy announcements under gems and jewellery
sector encompass: permission for duty free import of consumables for metals
other than gold and platinum up to 2 per cent of f.o.b value of exports; duty
free re-import entitlement for rejected jewellery allowed up to 2 per cent of
f.o.b value of exports; increase in duty free import of commercial samples of
jewellery to Rs.1 lakh, and permission to import of gold of 18 carat and above
under the replenishment scheme. Specific policy initiatives in leather and
footwear sector are mainly in the form of reduction in the incidence of
customs duties on the inputs and plants and machinery. The major policy
announcements for this sector include: increase in the limit for duty free
entitlements of import trimmings, embellishments and footwear components
for leather industry to 3 per cent of f.o.b value of exports and that for duty free
import of specified items for leather sector to 5 per cent of f.o.b value of
exports; import of machinery and equipment for Effluent Treatment Plants for
leather industry exempted from customs duty; and re-export of unsuitable
imported materials (such as raw hides and skin and wet blue leathers) has been
permitted. The threshold limit of designated ,Towns of Export Excellence' has
also been reduced from Rs.1,000 crore to Rs.250 crore in the above thrust
sectors. New Export Promotion Schemes A new scheme to accelerate growth
of exports ca|7ed'Target plus'has been introduced. Under the scheme,
exporters achieving a quantum growth in exports are entitled to duty free
credit based on incremental exports substantially higher than the general
actual export target fixed. Rewards are granted based on a tiered approach.
For incremental growth of over 20 per cent,25 per cent and 100 per cent, the
duty free credits are 5 per cent, l0 per cent and 15 per cent of f.o.b value of
incremental exports. Another new scheme called Vishesh Krishi Upaj Yojana
has been introduced to boost exports of fruits, vegetables, flowers, minor
forest produce and their value added products. Export of these products
qualify for duty free credit entitlement equivalent to 5 per cent of f.o.b value
of exports. The entitlement is freely transferable and can be used for import of
a variety of inputs and goods. To accelerate growth in export of services so as
to create a powerful and unique 'Served from India' brand instantly recognised
and respected the world over, the earlier duty free export credit (DFEC)
scheme for services has been revamped and re-cast into the 'served from India'
scheme. Individual service providers who earn foreign exchange of at least
Rs. 5 lakh, and other service providers who earn 530Inditt Ecomny:
Pcjorttanre and [Link] Contd.... foreign exchange of at least Rs.10 lakh are
eligible for a duty-credit entitlement of 10 per cent of total foreign exchange
earned by them. In the case of stand-alone restaurants, the entitlement is 20
per cent, whereas in the case of hotels, it is 5 per cent. Hotels and restaurants
can use their duty credit entitlement for import of food items and alcoholic
beverages. To make India into a global trading-hub, a new scheme to establish
Free Trade and Warehousing Zone (FTWZs) has been introduced to create
trade-related infrastructure to facilitate the import and export of goods and
services with freedom to carry out trade transactions in convertible currencies.
Besides permitting FDI up to 100 per cent in the development and
establishment of these zones, each zone would have minimum outlay of Rs.
100 crore and five lakh sq. mts. built up area. Units in the FTWZs qualify for
all other benefits as applicable for SEZ units. Further
Simplification/Rationalisation/ Modifications of Ongoing Schemes EPCG
scheme has been further improved upon by providing additional flexibility for
fulfilment of export obligation, facilitating and providing incentives for
technological upgradation, permitting transfer of capital goods to group
companies and managed hotels, doing away with the requirement of
certificate from Central Excise (in the case of movable capital goods in the
service sector) and improving the viability of specified projects by calculating
their export obligation based on concessional duty permitted to them. Import
of second hand capital goods without any restriction on age has been
permitted and the minimum depreciated value for plant and machinery to be
re-located into India has been reduced from Rs. 50 crore to Rs. 25 crore. The
new policy has allowed transfer of the import entitlernent under Duty Free
Replenishment Certificate (DFRC) scheme in respect of fuel to the marketing
agencies authorised by the Ministry of Petroleum and Natural Gas to facilitate
sourcing of such imports by individual exporters. The Duty Entitlement
Passbook (DEPB) scheme will continue until replaced by a new scheme to be
drawn up in consultation with exporters. Additional benefits have been
provided to export oriented units (EOU), including exemption from service
tax in proportion to their exported goods and services, permission to retain
100 per cent of export earnings in Export Earners Foreign Currency (EEFC)
accounts, extension of income tax benefits on plant and machinery to DTA
units which convert to EOU/Electronic Hardware Technology Park
(EHTP)/Software Balnnce of Paymenx and Trade Policy Contd537
Technology Park (STP)/Bio-technogy Park (BTP) units, allowing import of
capital goods on self-certification basis and permission to dispose of (for EOU
in textile and garment manufacture) leftover materials and fabrics up to 2 per
cent of c. i./ value or quantity of import on payment of duty on transaction
value only. Minimum investment criteria has been also waived for brass
hardware and hand-made jewellery EOUs (this facility already exists for
handicrafts, agriculture, floriculture, aquaculture, animal husbandry, IT and
services). The FTP proposes setting up of BTPs by granting all facilities of
100 per cent EOUs. The FTP 2004 has introduced a new rationalised scheme
of categorisation of status holders as Star Export Houses, with benchmark for
export performance (during the current and previous three years) varying from
Rs. 15 crore (for One Star Export House) to Rs. 5000 crore (for Five Star
Export House). The new scheme is likely to bestow status on a large number
ofhitherto unrecognised small exporters. Such Star Export Houses will be
eligible for a number of privileges including fast-track clearance procedures,
exemption from furnishing of bank guarantee, eligibility for consideration
under Target Plus Scheme, etc. Simplification of Rules and Procedures and
Institutional Measures Policy measures announced to further
rationalise/simplify the rules and procedures include exemption for exporters
with minimum turnover of Rs. 5 crore and good track record from furnishing
bank guarantee in any of the schemes, service tax exemption for exports of all
goods and services, increase in validity of all licences/entitlements issued
under various schemes uniformly to 24 months, reduction in number of
returns and forms to be filed, delegation of more power to zonal and regional
offices, and time-bound introduction of electronic data interface (EDI).
Institutional measures proposed in the FTP 2004 include revamping and
revitalising the Board of Trade, setting up of an exclusive Services Export
Promotion Council to map opportunities for key services in key markets and
setting up of Common Facility Centres for use of professional home- based
service providers in state and district level towns. Pragati Maidan in Delhi is
proposed to be transformed into a world class complex, with state-of-the-art,
environmentally controlled, visitor friendly exhibition areas and marts. The
FTP 2004 also proposes provision to deserving exporters, on the
recommendation of the Export Promotion Councils, of financial assistance for
meeting the costs of legal expenses connected with trade related matters.
Source: Economic Suney 2004-05. 532ltdian Lconanl: Perlornanre and
Policier India's Balance of Payment Trends 1950-2000 The Decades of Fifties
and Sixties Prior to 1956-57 , for most years in the fifties, India had a current
account surplus. But the position changed in 1956-57 when India faced BoP
crisis. The trade deficit increased from 3.8 per cent of GDP at market prices to
4.5 per cent. The BoP crisis of 1956-57 precipitated the imposition of
exchange controls which then became endemic to the import substitution
regime. The BoP position deteriorated once again in 1966-67. In 1965, the
United States suspended its aid in response to the Indo-Pakistan war and later
refused to renew the PL 480 agreement on a long-term basis. There was a
concerted effort by the United States, the World Bank, and the IMF to use
external assistance as an instrument to induce India (a) to adopt a new
agricultural strategy, and (b) to devalue the rupee. The rupee was devalued by
36.5 per cent in June 1966, and tariffs and export subsidies were
simultaneously rationalised, on the understanding that the inflow of aid would
be substantially increased. The BoP improved after 1966-67 but largely
because of the decline in imports. Exports performed indifferently despite the
devaluation. Balance of Payments in the Seventies A Decade of Comfort
India's balance of payments remained comfortable during the Seventies. The
adjustment to the first oil shock of 1973-74 was rendered smooth by a happy
combination of buoyant exports, spurt in private transfer receipts and
increased inflow of aid. Exports, benefited by the expansion in global trade,
rose at an annual rate of 6.8 per cent in volume terms and by 15.6 per cent in
US dollar terms during the decade. An effective depreciation of the rupee
occurred due to the link with Pound Sterling until 1973 and later, because of
the lower growth in prices in India relative to other countries. Private transfers
rose seven- fold from $ 296 million in 1974-75 to $ 2175 million in 1979-80
and in fact, in the post first oil shock period, financed roughly 80 per cent of
the trade deficit. Within two years of the shock, the current account balance
turned into surplus and it was only in 1978-79 that a deficit of about 0.2 per
cent of GDP appeared. The utilisation of aid was significant and was
substantially higher than the financing requirement for the decade, allowing
for a build up of reserves. At the close of the decade the foreign exchange
reserves stood at $ 7361 million providing cover for over 7 months of imports.
Balance of Payruents and, Tiade Policy Balance of Payments up to
1981-82533 The Period of Difficulties During the eighties, issues relating to
the balance of payments came to occupy the centre stage in terms of India's
macroeconomic management. The impact of the second oil shock of 1979, the
full effects of which spilled over into the eighties, was more severe than of the
1973-74. Between 1978-'79 and 1981-82, imports almost doubled. The
increase in POL imports accounted for a little over half the increase in the
overall imports. This was followed by the second-round effects on non-POL
imports. Export performance was depressed by the severe international
recession of 1980-1983 and recorded a volume growth of just a little over 3
per cent. Net invisible receipts continued to provide support to the balance of
payments, largely in the form of earnings from tourism and the sustained
buoyancy of private transfers. However, the sharp widening in the
merchandise trade deficit resulted in a turnaround in the current account
balance from a surplus in 1977-78 to a deficit in 1981-82 of the order of US $
3,166 million or 1.8 per cent of GDP. Adjustment efforts consisted essentially
of an Extended Fund Facility (EFF) negotiated with the IMF, although there
were also intensified efforts to improve domestic production of crude
petroleum. Balance of Payments during 1982-83 to 1984-85 Easing of
Pressure A reprieve came during the period 1982-83 to 1984-85, with the
easing of pressure on the balance of payments mainly due to a decline in the
volume growth of imports from an average rate of 11.0 per cent during
1978-1982 to a little over 2 per cent. Net oil imports (net of crude oil exports
which commenced in 1981-82 after the discovery of crude oil in Bombay
High), declined substantially as domestic production spurted to 29.0 million
tonnes by 1984-85. This indeed was the main cause of the easing of the
balance of payments. Non-POL imports rose at an average rate of 3.6 per cent
in dollar terms. Exports however, grew only at an average rate of 3.2 per cent,
in volume terms, due to a combination of adverse internal and external
conditions. The invisibles account deteriorated as the interest payments to
service external borrowing acquired a steady rising trend. Private transfers
stagnated with the arrest in the labour migration boom. As a result, invisibles
including private transfers and other surpluses, which had financed 89 per cent
of the trade deficit in 1978-79 could meet only 57 per cent of the trade deficit
in 1984-85. The current account deficit fell 534Indian Econonl: Petlornance
aild Policie! to US $ 2,416millionor 1.2 per cent of GDP in 1984-85 and
reserves, which were US $5,952 million at the end of the year, stood to cover
a little over 4 months of imports. Twenty nine per cent of the financing
requirement of the first half of the eighties was met by the EFF. Commercial
borrowings and non-resident deposits emerged as important sources of
finance, meeting 2l per cent and 15 per cent respectively of the financing
need. However, external assistance remained the major source of foreign
capital inflows, accounting for 39 per cent of the financing requirement.
Balance of Payments during 1985-1990 The Build-up to the Crisis The second
half of the eighties witnessed the building up of strains on the balance of
payments. Current account deficits acquired a structural character, remaining
at high levels throughout. Large trade deficits occurred year after year despite
a robust growth in exports. Recovering from the stagnation in 1985-86, the
volume growth of exports in the succeeding four years ranged between l0 to l2
per cent per annum on an average. The share of manufactured exports rose
from 56 per cent in 1980-81 to 75 per cent in 1989-90. Imports in US dollar
terms rose in every year of the period. The volume of net POL imports
increased from 12.4 million tonnes in 1984-85 to 23.5 million tonnes in
1989-90. However, the fall in crude oil prices during the period helped to
contain the oil import bill. On the other hand, non-oil imports rose sharply by
an average of 13.4 per cent in US dollar terms partly due to large imports of
foodgrains in 1988-89. Imports of capital goods rose by an average of 16.2 per
cent during the period. Export-related imports as well as other miscellaneous
imports also rose significantly. The category of non-DGCIS imports,
comprising defence imports and imports of ships and aircrafts etc., also rose
significantly from about US $1.2 billion in 1985-86 to US $ 3.1 billion by
1989-90. The support from invisible receipts fell in the face of steadily
growing interest payments and the outgo on account of profits, dividends,
royalty, technical fees and professional fees. The current account deficit
averaged $ 5.8 billion or 2.4 per cent of GDP during the period as against the
Planning Commission's estimate of 1.6 per cent. The period also marked a
deterioration in fiscal imbalances as the ratio of gross fiscal deficit to GDP
rose from 6.3 per cent in the first half of the eighties to 8.2 per cent during
1985-1990. Repurchases from the IMF under the EFF exacerbated the
deterioration in the balance of payments. External assistance, commercial
borrowing and non-resident deposits Balance of Payments and Trade Policy
>5> shared equiproportionally in the financing need. The result was a
doubling of external debt and a rise in the debt service ratio from 13.6 per cant
in 1984-85 to 30.9 per cent in 1989-90. The Crisis: 1990-1992 In 1991, India
found itself in its worst balance of payments crisis since 1947. That there was
a crisis in the making during the second half of 1980s had been evident for a
long time. The inflow of foreign borrowing had increased at a rapid rate
during the late 1980s' This was due to the excess domestic expenditure over
income-the fiscal deficit of the Centre and the States soared to over 1l per cent
in 1991. During this period total public debt as a proportion of GNP doubled
reaching the level of 60 per cent and foreign currency reserves were depleted
rapidly. Matters were made worse by an accompanying double-digit inflation
in 1990-91. The oil price increase resulting from Iraq's invasion of Kuwait in
August 1990 reinforced the crisis-like situation in India. India's credit rating
got downgraded as, for the first time in its history, India was on the verge of
defaulting on its international commitments and was denied access to external
commercial credit markets. A net outflow of Non-Resident Indian (NRI)
deposits commenced in October 1990 and continued during 1991. The only
way left for India was to borrow against the security of its gold reserves
transported abroad. But something good emerged out of the BoP crisis of
199L-the long overdue economic reforms. Apart from an immediate
programme of macroeconomic stabilisation, structural reforms were also
introduced in the industrial and trade policy regimes with a view to improving
the efficiency, productivity and international competitiveness of India's
economy. The overvalued exchange rate was corrected by devaluation in
1991, followed by partial convertibility of rupee in 1992-93 and then making
the rupee fully convertible on trade account in 1993-94' Tariffs were also cut
steeply to open Indian industry to foreign competition. The focus of import
liberalisation has primarily been on intermediate and captial goods industries
with the imports of consumer goods remaining. by and large, regulated. 536
Irdiar Econonl: Perfornann and Policiet Balance of Payments during 1993-94
to 2005,06 The initial response of the economy, especially exports, was very
good. The years 1993-94 to 1995-96 were years of excellent economic
performance with GDP having grown at 6.2 per cent in 1993-94 and by more
than 7.5 per cent during 1994-95 and 1996-91. Exports grew by 19.7 pu cent
during 1993-94 to 1995-96. The major reasons for such a high growth rate in
exports were:2 . World GDP grew by an average rate of 4.1 per cent per
annum during 1994-97 compared with2.4 per cent during L990-1993. . World
trade (dollar terms) grew by an average rate of 9.8 per cent per annum during
1994-1997 compared with 6.0 per cent during 1990-1993. . Imports of
advanced countries (dollar terms) grew by an average rate of 11.5 per cent
during 1994-1997 compared with 2.1 pu cent during 1990-1993. . Increase in
India's share in world exports of its three major commodity groups, viz.
Textiles, yarn and fabrics; pearls, precious and semi-precious stones; and
clothing and accessories during 1994-96. . Increase in the Index of
Comparative Advantage (ICA) of the above. . Other export commodity groups
in which India gained in terms of ICA during 1994-1996 include fish and fish
preparations; rice; coffee and substitutes; organic chemicals; footwear; and
gold and silver jewellery. However, the boom was short-lived. Since 1996,
India's export performance has been poor. There could be several explanations
for this. Firstly, there has been a major downturn in world trade since 1996,
which has affected India's trade as well. Export growth has been further
hampered by an appreciation of the real effective exchange rate in 1996-97
and, 1997- 98. This trend has, however, been reversed since 1998-99. There
has also been an adverse movement in terms of trade, which appears to have
affected exports. Finally, there are the host of domestic factors-both policy
related and administrative-which continue to hamper imports. These include
infrastructure constraints, high transaction costs, SSI 2. Chadha, Rajesh
(1999). "Balance of Payments and Trade Policy", paper presented at ADB-
NCAER Seminar on Economic and Policy Reforms in India (Dec- 9) India
International Centre. New Delhi. Balance of Payments and Tiade Policy 537
reservations, labour inflexibility, quality problems and quantitative
restrictions on export of agricultural commodities. However the surplus on
invisibles has helped to reduce the deficit on the current account. Earnings
from invisibles have helped particularly during the critical years of 1996-97
and 1997-98 when the deficit on the trade account touched alarming levels
close to $ 1.5 to 1.6 billion. A current account surplus for the third successive
year, coupled with an expanding capital account, further strengthened India's
balance of payments in 2003-04. The year witnessed accumulation of reserves
of US$ 31.4 billion (excluding valuation changes, gold, Special Drawing
Rights and Reserve Tranche at the IMF). Almost one-third of the reserves
were contributed by the surplus in the current account (Table 24.1). Rising
surpluses in the current account have been one ofthe distinguishing features of
India's balance of payments in the current decade, as it has been for most other
major Asian economies (e.g. China, Hong Kong, Japan, Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand). While for the predominantly
export-oriented South East Asian economies (e.g. Korea, Malaysia,
Philippines, Singapore, Taiwan and Thailand), strong growth in merchandise
exports has been the main driver behind the current account surpluses,
buoyant invisible inflows, particularly private transfers comprising
remittances, along with software services exports, have been instrumental in
creating and sustaining current account surpluses for India. The strength
provided by the surplus in the current account was reinforced by robust capital
inflows in2OO3-04. During the year, capital account surplus was almost
double its previous year's level (Table 24.I). While major components of loans
(e.g. external assistance and commercial borrowings) recorded net outflows,
foreign investment flows increased more than three-fold. Heavy portfolio
inflows, comprising essentially FII investment, shored up total foreign
investment and the overall capital account surplus. Banking capital inflows,
particularly expatriate deposits, also contributed to the expanding surplus.
Balance of payments estimates for April-September, 2004-05, 2005-06
indicate the emergence of a current account deficit (Table 24.1).The year
2004-05 marked a significant departure in the structural composition of India's
balance of payments (BOP), with the current account, after three consecutive
years of surplus, turning into a deficit. In a significant transformation, the
current account deficit, observed for 24 years since 1977-78, had started
shrinking from 1999-00. The Balance of Payruents and Tt'ade Policy 539
contraction gave way to a surplus in 2001-02, which continued until 2003-04.
However, from a surplus of US$14.1 billion in 2003-04, the current account
turned into a deficit of US$5.4 billion in 2004-05. The turnaround in the
current account during 2004-05 was accompanied by a significant
strengthening of more than 80 per cent in the capital account resulting in
continued reserve accretion. Compared with 2003-04, when loan inflows had
turned into net outflows, such inflows shot up rapidly during 2004-05 and
bolstered the size of the capital account surplus with good support from robust
foreign investment inflows. Reserve accumulation during 2004-05, at around
four-fifths of such accumulation during 2003-04, maintained India's status as
one of the largest reserve-holding economies in the world. The broad trends
observed in the current and capital accounts in 2004-05 have been maintained
during 2005-06. The current account continues to be in deficit with the size of
the deficit during the first half of the current year (April-September 2005)
almost twenty seven times that of the deficit in the corresponding previous
period. Indeed, the current account deficit of US$ 5.3 billion during the first
quarter (April-June 2005) itself was almost equivalent to the deficit for the
whole of 2004-05. During the second quarter (July-September 2005)' the
deficit became even larger (US$7.7 billion) after growing at almost 45 per
cent over and above that of the previous quarter' The rapidly enlarging trade
deficit, buoyed by remarkable import growth, has been pushing the current
account deficit. During the period 2001-02 to 2003- 04, the invisibles (net)
always overcame the trade deficit to maintain the current account in surplus.
However, the trend was reversed in2004- 05 and appears to be continuing in
2005-06. At present, India is one of the few leading economies in the South
East Asian region to have a fairly large current account deficit. The widening
of the current account deficit has been accompanied by a similar widening of
the capital account surplus. The capital account surplus during the first half of
the current year has been more than one and a half times the surplus in the
corresponding period of the previous year. Moreover, between the first and
second quarters, while the current account deficit increased by 45 per cent, the
capital account surplus almost doubled in size (US$ 12.9 billion in
July-September 2005 vis- d-r,is US$6.5 billion in April-June 2005). Since
2002-03, much of the strengthening of India's capital account has emanated
from augmentation of non-debt creating foreign investment (net) inflows,
particularly Foreign Institutional Investor (FII) inflows. During the 540Indian
Economl: Performance and Policiet current year, robust FII inflows were
more than eleven times higher than such inflows during April-September
2004. The bulk of this increase occurred during July-September 2005, in
response to the rising buoyancy in the stock markets. The period also
witnessed an increase in inflows of commercial borrowings and short term
credits on account of lower interest rate spreads on external borrowings and
higher import financing requirements. The cumulative impact of higher debt
and non- debt creating flows was a notable expansion in the size of the capital
account surplus. The expansion succeeded in retaining an overall surplus in
the balance of payments and resulted in a net reserve accretion of US$6.5
billion during April-September 2005, which was only marginally lower than
the accretion of US$ 6.9 billion during April- September 2004. Invisibles In
the three successive years of current account surpluses endingin 2003-04,
buoyant net earnings from invisibles more than compensated for the trade
deficits. In 2004-05, with growth of more than 12 per cent, earnings from
invisibles crossed US$30 billion; but with the trade deficit growing by a much
larger 167 per cent to over US$36 billion, the current account balance turned
into a deficit. In the first half of 2005-06 as well, while invisibles grew by 3l
per cent, the trade deficit grew much faster by ll4 per cent, and resulted in a
sharp widening of the current account deficit. Within invisibles, the
contribution of different categories to overall invisible earnings has changed
significantly since the early 1990s. Traditionally, private transfers, comprising
mainly remittances from Indians working abroad, had been the main source of
invisible earnings. Over time, however, non-factor services have emerged as
another key component of invisibles. Indeed, beginning from 1991-92 till
2OOl-02 (except 1999-2000), private transfers always exceeded invisibles
(net). However, since 2002-03, overall invisibles have been higher than
private transfers, mainly due to rising contribution of non-factor services. As a
proportion of total invisibles (net), the share of private transfers has declined
from 121 per cent in 1996-97 to around 65 per cent in 2004-05, while that of
non-factor services has improved from 7 per cent to 45.5 per cent during this
period. The increasing share of non-factor services in invisibles can be traced
to the buoyancy in export of software services. Net earnings from software
services increased by 34.1 per cent from US$12.3 billion in 542Iulittn
Ennon)': Pelbrttance atl Po/icies 2003-04 to US$16.5 billion in 2004-05. The
rate of growth was more or less maintained during the first half of 2005-06
with such receipts growing by 30 per cent from US$7.6 billion in
April-September 2OO4 to US$9.8 billion. Indeed, the robust growth in export
of software services has been responsible for an overall growth of 59 per cent
in net non-factor services receipts in April-September 2OO5 vis-d-vis April-
September 2004, since the other leading components of non-factor services,
travel and transportation, became net outflows during April- September 2005.
While higher outbound tourist traffic has resulted in net travel outflows, such
developments in transportation also reflect higher outgo related to rising
volume of imports and mounting freight rates. India continues to remain the
highest remittance receiving country in the world (Box 24.3). Buoyant private
transfers have imparted strength and stability to net invisibles receipts.
Between 1990-91 and 2003-04, private transfers increased every year except
in 1997-98 and 1998-99. In 2004-05, however, private transfers declined by
6.3 per cent. Developments in the first half of the current year, with growth of
20.8 per cent in private transfers, probably indicate a return to the earlier
secular trend. BOX - 24.3 Trade in Services Services account for more than 60
per cent of world GDP, and trade in services has grown more rapidly than
merchandise trade since 1985. Ln2004, while India's share in world
merchandise exports was 0.8 per cent, the corresponding share in world
commercial services was 1.9 per cent. Services, accounting for 54.1 per cent
of GDP in 2005-06, is a sector of critical interest in India. In terms of annual
average rate of growth, world exports of commercial services, i.e. non-factor
services (services henceforth), not only increased faster (7 per cent) than such
exports of merchandise (5 per cent) between 2000 and 2003, but also
accelerated from 7 per cent in 2002 to 13 per cent in 2003. Reflecting the
importance of services in their overall economic activities, industrial countries
dominate global exports of services. Nearly two-thirds of the global trade in
services is contributed by the EU, US and Japan. While the share of US and
Spain continue to rise, that of UK, France, Italy, Japan and the Netherlands
have registered declines over the years. India accounted for 1.4 Per cent
Balance of Paymenx and Trade Policl543 .Contd.... of total exports and 1.2
per cent of world imports of services in 2003. China, Ireland, Korea and India
have emerged as important service exporters. Between 1992 and 2003,
China's and India's export of services increased from US$ 9.1 billion to US$
46.4 billion, and from US$ 4.9 billion to US$25.0 billion, respectively. A
sharp rise in earnings from tourism and increased earnings from IT and ITES,
including software exports, were the reasons for the enhanced services exports
in China and India, respectively. India was the 20th leading exporter of
services in 2003. Table Export of Major Services as per cent of Total Services
Exports Trdnsportation Software Miscellaneous* t995-96 2000-0 r 200t-02
2002-01 2003-04 Apr.-Sept., 0436.9 2t.5 18.3 r6.0 16.5 9.92't.4 12.6 12.6 12.2
13. r tt.7to.2 39.0 44.t 46.2 48.9 36.922.9 21.3 20.3 22.4 r 8.7 3'7.2 Note: *
Miscellaneous services excluding software. The potential for growth,
however, continues to be large. There was an upward shift in the trend growth
of services exports (in US dollar terms) from 7.9 per cent in the first half of
the decade of the 1990s to 15.3 per cent during 2000-01 to 2003-04. Software
and other miscellaneous services (including professional, technical and
business services) have emerged as the main categories in India's export of
services. The relative shares of travel and transportation in India's service
exports have declined over the years, while the share of software exports has
gone up to 49 per cent in 2003-04. The buoyant growth of professional,
technical and business services has provided a cushion against the slowdown
in traditional services such as travel and transportation. The share of other
miscellaneous services, which was around 20 per cent until 2003-04,
registered a sudden rise to 37 per cent in April-September, 2004. The
comparative advantage of India in software, telecom and other business
services is well-documented in several studies. Services exports grew by 20.2
per cent in 2003-04,7 1 per cent in 2004- 05 and 75 per cent in
April-September, 2005. In 2004-05, software service exports grew by 34.4 per
cent and 32 per cent in the first half Contd )++ .. ContdItdi,tu Etauaq^:
Peryotu,tn,e auJ Poli,ie: of 2005-06. India's share in the world market for IT
sofrware and services (including BPO) increased from around 1.7 per cent in
2003- 04 to 2.3 per cent in 2004-05 and an estimated 2.8 per cent in 2005- 06.
A new development in services exports is the explosiv egrowth of business
services, including professional services. This is reflected in the growth of
miscellaneous services excluding software, which grew by 216 per cent to US
$ 16.3 billion in 2004-05, and 181 per cent in the first half of the current year
to reach a level of US $ 15.4 billion and surpass even the value of software
services exports. The enormous opportunities for further growth of these
services make WTO negotiations in services all the more important for India.
With the liberalisation of exchange restrictions on current account, services
imports have also increased over time. Travel payments, for example, rose on
account of outward movement of workers and professionals, and a spurt in
outbound tourist traffic from India and exceeded travel receipts in
April-September, 2004. However, overall faster growth of services receipts
over payments resulted in the net surplus from services trade increasing from
US$ 980 million in 1990-91 to US$ 6,591 million in 2003-04. Software
exports have grown at an annual compound growth rate of around 36 per cent
between 1995-96 and 2003-04. While the market share of India in global IT
spending has increased, yet its low level of an estimated 3.4 per cent in
2003-04 indicates a large scope for future expansion, particularly in payment
services, administration and finance. It is estimated that outsourcing has been
resulting in cost saving in the range of 40- 60 per cent of trans-national
corporations. The IT industry is projected to grow to 7 per cent of GDP (2.64
in 2003-04) and account for 35 per cent of total exports (27.3 per cent in
2003-04) by 2008. An export potential of US$ 57-65 billion for the software
and services sector can be realised, with ITES-BPO sector contributing $
Zl-24 billion by 2008. The constraints on potential opportunities in services
trade include lack of set up like export promotion councils other than for
computer software, various visible and invisible barriers to services trade, for
example visa restrictions, economic needs test, sector specific restrictions and
selective preferential market access through regional initiatives. These need
careful examination in the context of the requests and offers of different
countries in WTO. Despite the constraints, there is scope for increasing
diversification into a variety Conrd Balance of Paymentt and Trade Policy
..Contd. ...545 of areas such as consultancy and R&D; services, healthcare,
entertainment services, ship repair services, satellite mapping services,
telecom, educational services, accounting services and hospitality services and
also beyond the major markets of EU, US, and Japan. The policy measures
announced in the Foreign Trade policy 2004-09 to promote services exports
should help along with proper synergy between economic policies and trade
strategies. In the ongoing negotiations at WTO under the General Agreement
on Trade in Services (GATS), the offers of most countries do not provide any
significant new openings for trade, especially in areas of interest for
developing countries. Given its strong competitive edge in IT and ITES, and
competence of its professionals, India,s efforts have been to get binding
commitments in cross-border supply of services (Model) and movement of
natural persons (Mode 4). In Mode 4, India has been pushing for clear
prescription of the duration of stay and removal of the Economic Needs Test
(ENT). Though the services negotiations have been salvaged at the Hong
Kong Ministerial, quick and detailed work is needed in the form of examining
the detailed requests and offers and arriving at concrete proposals in each of
the 12 main categories and 156 sub-categories of services. Besides software in
which India has already made an impact, there is good potential for export of
many other professional services, like super-speciality hospital; satellite
mapping; printing and publishing; accounting, auditing and book-keeping
services. Besides greater efforts at marketing, there is a need to negotiate both
multilaterally and bilaterally, issues like the National Health Service Systems
in European countries like UK which virtually deny market access; lack of
coverage of medical expenditure incurred abroad by US medical insurance
companies; need based quantitative limits; need to be natural persons; and
accreditation rules. Similarly, in the case of accounting, auditing and
bookkeeping services, market access limitations, which are mainly in the form
oflicensing, accreditation, in-state residency and state level restrictions in
countries like US, have to be negotiated. Some liberal sectoral commitments
by developed countries get automatically negated by the restrictive horizontal
limitations of entry for speciality occupations which needs to be addressed in
WTO negotiations. Source: Economic Survey 2004-05 and 2005-06.
546Indiau Econonl: Perlornance ail Policies Capital Account, External Debt
and Exchange Rate Approach, Developments and Issues Reflecting the
inward oriented economic policies in pursuit of self- reliance through export
bias and import substitution, the role of the capital account during the 1980s
was basically that of financing the current account deficits (RBI, 1999). The
widening of the current account deficit during the 1980s coupled with the
drying up of traditional source of official concessional flows necessitated a
recourse to additional sources of financing in the form of debt creating
commercial borrowings, non-resident deposits and exceptional financing in
the form of IMF loans. The external payment crisis of 1991 brought to the fore
the weaknesses of the debt-dominated capital account financing. Recognising
this, structural reforms and external financial liberalisation measures were
introduced during the 1990s. The policy shift underscored the need for
gradually liberalising capital account recognising that this is a process rather
than a single event (Jalan, 1999). Throughout the 1990s the role assigned to
foreign capital in India has been guided by the consideration of financing a
level of current account deficit that is sustainable and consistent with
absorptive capacities of the economy (Rangarajan, 1993; Tarapore, 1995;
Reddy, 2000). In India, the move towards full capital account liberalisation
has been approached with extreme caution. Taking lessons from the
international experience, the Committee on Capital Account Convertibility,
1997 (Chairman: S. S. Tarapore) suggested a number of pre-conditions,
attainment of which was considered necessary for the success of the capital
account liberalisation programme in India (Box 24.4). The High Level
Committee on BoP had recommended the need for achieving this
compositional shift. Keeping in line with the policy thrust, capital flows have
undergone a major compositional change in the 1990s in favour of non-debt
flows. Balance of Payments axd Trade Policy 547 BOX - 24.4 Committee on
Capital Account Liberalisation (Chairman: S.S. Tarapore) With the growing
role of private capital flows and the possibility of occasional sharp reversals,
the issue of capital account liberalisation and convertibility has spurred
extensive debate since 1992-the period which witnessed a series of
[Link]; in Europe (1992-93), Mexico (1994-95), East Asia (1991-98),
Russia (1998), Brazil (1999), Turkey (2000) and Argentina (200I-02). These
crises have raised the question of desirability of liberalisation and whether it is
advisable to vest the IMF with the responsibility for promoting the orderly
liberalisation of capital flows. The IMF in its study (1998) stated that "As
liberalised systems afford opportunities for individuals, enterprises and
financial institutions to undertake greater and sometimes imprudent risks, they
create the potential for systematic disturbances. There is no way to completely
suppress these dangers other than through draconian financial repression,
which is more damaging." The view of IMF itself has changed over time
(RBI, 2001). While opening up of the capital account may be conducive to
economic growth as it could make available larger stocks of capital at a lower
cost for a capital-deficient country, the actual performance of the economy,
however, typically depends on a host of other factors. For a successful
liberalised capital account, emerging market countries could: (i) pursue sound
macroeconomic policies; (ii) strengthen the domestic financial system; (iii)
phase capital account liberalisation appropriately, and (iv) provide
information to the market. At the international level, there is also the role of
surveillance to consider, including the provision of information and the
potential need for financing (Fischer, 1997). In India, the move towards full
capital account liberalisation has been approached with extreme caution. The
Report of the Committee on Capital Account Convertibility, 1997 (Chairman:
[Link]) taking into account lessons from international experience
suggested a number of signposts, the attainment of which are a necessary
concomitant in the move towards capital account convertibility. Fiscal
consolidation, Iower inflation and a stronger financial system were seen as
crucial signposts for India. India followed a gradualist approach to
liberalisation of its capital account. India did not experience reversal of its
policies. towards the capital account as was the case with some emerging
market economies 54EIndian Ecanonl: Pe(ornance and Po/icies that had
followed a relatively rapid liberalisation without entrenching the necessary
preconditions. This is particularly important since cross- country studies do
not provide clear evidence of increase in capital flows resulting from capital
account openness across all developing countries, with only 14 developing
countries accounting for about 95 per cent of net private flows to developing
countries in the 1990s. Besides, empirical evidence on the positive effects of
financial capital flows on economic growth is not yet conclusive (Edison et
al., 2002). Foreign Investment During the first three decades after
Independence, foreign investment in India was highly regulated. In the 1980s,
there was some easing in foreign investment policy in line with the industrial
policy regime of the time. The major policy thrust towards attracting foreign
direct investment (FDI) was outlined in the New Industrial Policy Statement
of 1991. Since then, continuous efforts have been made to liberalise and
simplify the norms and procedures pertaining to FDI. At present, FDI is
permitted under automatic route subject to specific guidelines except for a
small negative list. In the recent period, a number of measures have been
taken to further promote FDI. These include: raising the foreign ownership
cap to 100 per cent in most of the sectors, ending state monopoly in insurance
and telecommunications, opening up of banking and manufacturing to
competition and disinvestment of state ownership in Public Sector
Undertakings (PSUs). Though the FDI companies have generally performed
better than the domestic companies, FDI to India has been attracted mainly by
the lure of the large market. Magnitude Responding to the policy efforts,
foreign investment inflows to India (direct and portfolio investments taken
together) picked up sharply in 1993-94 and have been sustained at a higher
level with an aberration in 1998-99, when global capital flows were affected
by contagion from the East Asian crisis. Total foreign investment has
averaged at US $ 5.4 billion during the three year period 1999-2000 to
2001-02 as against negligible levels of the 1980s. Foreign Portfulio
Investment (FPI) Like FDI, the environment for FPI was also made more
congenial through procedural changes for investment and by offering more
facilities for investment in equity securities as well as in debt securities
Baknce of Paywen* and Trade Policy549 to a select category of portfolio
investors, viz., the Foreign Institutional Investors (FIIs). Furthermore, the
sectoral limits for FIIs in the Indian companies were progressively increased
over time; these limits have been done away with altogether, except in select
specified sectors. The NRIs, Overseas Corporate Bodies (OCBs) and persons
of Indian Origin (PIos) are also permitted to invest in shares and debentures of
Indian companies, government securities, commercial papers, company
deposits and mutual funds floated by public sector banks and financial
institutions. NRI Deposits NRI deposits in the form of Non-Resident
(External) Rupee Account (NR(E)RA) and Foreign Currency Non-Resident
Account (FCNR(A)) emerged as a steady flow of foreign capital in India from
the 1970s, following the labour migration boom in West Asia in the wake of
the first oil shock. The onset of the 1990s saw the introduction of as many as
five NRI deposit schemes [Foreign Currency Bank and Ordinary (FC(B&O;)),
Foreign Currency Ordinary Non-Resident (FC(ON)), Non- Resident
Non-Repatriable Rupee Deposit (NR(NR)RD), Non-Resident Special Rupee
Account (NR(S)RA) and Foreign Currency Non-Resident Bank (FCNR(B))I
between 1990 and 1993 designed to attract foreign exchange in the face of
external payments crisis of 1991. The policies with regard to NRI deposits
during the 1990s have been aimed at attracting stable deposits. This has been
achieved through: (i) a policy induced shift in favour of local currency
denominated deposits; (ii) rationalisation of interest rates on rupee
denominated NRI deposits; (iii) linking of the interest rates to LIBoR for
foreign currency denominated deposits; (iv) de-emphasising short-term
deposits (up to 12 months) in case of foreign currency denominated deposits;
and (v) withdrawal of exchange rate guarantees on various deposits. The
Reserve Bank has also made an active use of reserve requirements on these
deposits as an instrument to influence monetary and exchange rate
management andto regulate the size of the inflows depending on the country's
requirements. External Commercial Borrowings Commercial debt capital
includes a whole range of sources of foreign capital where the overriding
consideration is commercial. External commercial loans include bank loans,
buyers' credit, suppliers' credit, securitised instruments such as Floating Rate
Notes and Fixed 55O Indian Econttl: Perfornatct and Policie'r Rate Bonds,
commercial borrowings and the private sector window of multilateral
financial institutions. The policies towards External Commercial Borrowings
(ECBs) since the reform programme have been guided by the overall
consideration of prudent external debt management by keeping the maturities
long and cost low. ECBs are approved within an overall annual ceiling. Over
time, the policy has been guided by a priority for projects in the infrastructure
and core sectors such as power, oil exploration, telecom, railways, roads and
bridges, ports' industrial parks, urban infrastructure and for 100 per cent
Export Oriented Units (EOUs). To allow further flexibility to borrowers,
end-use and maturity prescriptions have been substantially liberalised.
Moreover, corporates have been allowed to borrow up to a certain limit under
the 'automatic route'. Apart from these, special bonds (India Development
Bonds (IDBs), Resurgent India Bonds (RIBs) and India Millennium Deposits
(IMDs) were issued by the State Bank of India aimed at NRIs. The success in
mobilising foreign exchange resources through such exceptional schemes
reflected the confidence of the global investor community in the Indian
economy and imparted an element of stability to the external sector and the
overall balance of payments position. At times, the rationale behind raising
such high cost debt capital has been questioned. Experience, however, would
suggest that each time this option was resorted to, it helped in strengthening
the confidence in the Rupee and the ability of the country to honour its
obligations. The costs of an exchange rate crisis are too severe in relation to
cost of debt capital. In a situation of moderate debt-service ratio, such debt
capital makes more sense than allowing the exchange rate to fall under
pressure' Decline in Foreign Aid Over the same period, official aid has waned
in importance. This reflected mainly growing amortisation payments in the
face of sluggish disbursements of external assistance as also availability of
alternative private capital flows. Unlike aid, the share of ECBs in total capital
flows have increased from around 31 per cent in 1990-91 to around 40 per
cent in 1997 -98. This has been mainly on account of the higher appetite for
ECBs in view of the strong import demand and industrial growth. Impact of
Reforrns on BoP The impact of the continuum of reforms initiated in the
aftermath of the balance of payments crisis of 1991 on India's current account
Balance of Palments and Trade Policy551 and capital account resulted in an
accumulation of foreign exchange reserves of over us $ 141 billion as at
end-March 2005. capital account surplus increased from US $ 3.9 billion
during the 1980s to US $ g.6 billion during 1992-2002 with a steadily rising
foreign investment. As a proportion of GDP, capital flows increased from 1.6
per cent during 1980s to 2.3 per cent during 1992-2002. The significant
increase in capital flows during the 1990s raises the issue of their determinants
as well as their impact on growth. Since 1990-91, India's capital account has
experienced several interesting changes in terms of the relative roles played
by different varieties of capital flows in augmenting the overall balance.
Between 1998-99 and 2001-02, the share of foreign investment in the overall
capital account balance increased steadily from 29 per cent to 80 per cent.
Thereafter, however, the proportion has followed an oscillating pattern within
a band of 39 to 79 per cent. It appears that the importance of debt-creating
flows !n the overall balance of payments increased with the emergence of a
current account deficit in 2004-05. Debt-creating flows comprising external
assistance, commercial borrowings and non- resident deposits, after being
negative for two successive years, were 19 per cent of the capital account
surplus in 2004-05. This trend in debt- flows appears to have continued in
2005-06. The evolution of capital flows over the 1990s reveals a shift in
emphasis from debt to non-debt flows with the declining importance of
external assistance and ECBs and the increased share of foreign
investment-both direct and portfolio. Apart from financing the current account
gap, capital flows have played a significant role in India's growth
performance. Evidence of strong complementarity with domestic investment
suggests that capital flows brighten the overall investment climate and
stimulate domestic investment even when a part of the capital flows actually
gets absorbed in the form of accretion to reserves. The growth- augmenting
role of foreign capital, particularly FDI, however, seems to have been
constrained by the low levels of actual and planned absorption of foreign
capital in India (RBI, 2001). The key indicators of balance of payments as
explained in Table 24.3 (also Table A-23.1 in ch.23) show considerable
improvement in India's balance of payments since 1991 . 552Indiax Ecoroml:
Perlormance and Policiet TABLE _ 24.3 Balance of Payments - Key
Indicators (Per Cent) hent 1990-91 1995-96 1999-00 2000-01 2001-02 l.
Trade i) Exports/GDP ii) Imports/GDP iii) Trade Balance/GDP 2. Invisibles
Account i) Invisible Receipts/GDP ii) Invisible Payments/GDP iii) Invisibles
(NeI)/GDP 3. Current Account i) Current Receipts@/ GDP ii) Current
Receipts Growth@ iii) Current Receipts@/ Current Payments iv) CAD/GDP
4. Capital Account i) ForeignlnvestmenI/GDP ii) Foreign Investment/ Exports
5. Others i) Debt-cDP Rario ii) Debt Service Ratio iii) Liability Service Ratio
iv) Import Cover of Reserves (in months)5.8 8.8 -3.0 2.4 2.4 -0.1 8.0 6.6 7 r.5
-3.1 0.69t 8.4 r2.3 r2.4 -3.2 -4.0 5.0 6.8 3.5 3.8 1.6 3.0 14.0 15.1 t8.2 12.9 88.8
93.0 -1.7 - 1.0 1.4 1.2 r4.9 13.8 2'7.0 22.2 24.3 16.2 24.'t t7 .09.8 9.3 t2.9 12.0
-3.1 -2.'7 '7.5 t.4 4.9 4.s 2.6 2.9 17 .2 16.7 t7 .t 1.4 96.4 r}t.2 -0.5 0.3 1.1 r.2
r1.4 r3.2 22.3 20,8 17.3 t4,t 18.3 15.3 8.6 11.3287 353 356 8260 25 Notei @ i
Excluding official transfers. - : Negligible. External Debt Management Key
indicators of debt sustainability point to the continuing consolidation and
improved solvency in the 1990s. Although, in nominal terms, India's total
outstanding external debt increased from'US $ 83.8 billion at end-March 1991
to US $ 98.5 billion at end-March 2002, Balance of Palmen* and Tiade Policy
,53 external debt to GDP ratio declined sharply from28.7 per cent at end-
March 1991 to 20.9 per cent at end-March 2002. Prudent external debt
management is also reflected in the proportion of short-term debt to total debt
declining from 10.2 per cent in 1991 to 2.8 per centin2O02 and in the ratio of
short-term debt to foreign exchange reserves from a high of 146.5 per cent in
the crisis period of 1991 to only 5.1 per cent in20Ol-02. Debt service ratio
declined from 35.3 per cent in 1990-91 to l4.l per cent in2OOl-02 (Table
24.4).Intercst payments to current receipts ratio declined from 15.5 per cent in
1990-91 to 5.4 per cent in 200r-02. TABLE _ 24.4 Major Indicators of
External Debt (as at end-March) (Per Cent) Items t99r 1996 20002001 2002 1.
Total Debt to GDP 28.1 2. Short-term Debt 2.9 (original maturity) to GDP 3.
Concessional Debt 45.9 to Total Debt 4. Short-term Debt 146.5 (original
maturity) to Foreign Exchange Reserves 5. Short-term Debt 382.1 (original
maturity) to Foreign Currency Assets 6. Non-Debt Liabilities 148.2 and
Short-term Debt to Reserves 7. Short-term Debt 146.6 and Non-debt
Reversible Liabilities to Reserves 8, Debt Service Ratio 35.3 9, Debt to
Current 328.9 Receipts 10. Liability Service Ratio 35.621 .0 22.t 22.4 20.9 t 4
0.9 0.8 0.6 44.7 3 8.9 35.5 3 6.0 23 .2 10.3 8.6 s. 1 29 .5 tt .2 9.2 5 .4 92.3 99.9
100.8 8 8.4 1t.t 59.0 58.5 48.1 24.3 188.9 24.716.2 17.5 14.r t45.6 126.2 122.5
t1.o 18.3 15.3 The decade of 1990s witnessed a steady move towards
consolidation of India's external debt statistics in terms of size, composition
and indicators of solvency and liquidity. Containing the increase in the size
554Idian Ecoronl: Perfornaxre and Policiet of external debt to a modest level
in the face of a tremendous growth in foreign exchange reserves during the
decade definitely points towards the success of India's debt management
strategy. Reflecting this, in terms of indebtedness classification, the World
Bank has categorised India as a less indebted country since 1999. Among the
top 15 debtor countries of the world, India improved its rank from third debtor
after Brazil and Mexico in 1991 to ninth in 2000 after Brazil, Russian
Federation, Mexico, China, Argentina, Indonesia, Korean Republic and
Turkey. Moreover, among them, key external debt indicators such as
short-term debt to total debt and short-term debt to forex reserve ratios are the
lowest for India; the concessional to total debt ratio is the highest, while debt
to GNP ratio is the second lowest after China. Exchange Rate Management In
the context of globalisation and currency crises, recent years, particularly,
have seen a renewed interest on the issues relating to exchange rate regime,
which is evident in the large and growing body of theoretical and empirical
literature on the subject. Nevertheless, both in theory as well as in practice, the
state of the debate is unsettled. A worldwide consensus is still evolving in
search of an appropriate and credible exchange rate regime. In India also,
discussion and debate on issues relating to the appropriate exchange rate
system, policies on intervention, capital control and foreign exchange reserves
figure very prominently. This is especially relevant with the introduction of a
market-based exchange rate system in March 1993 and in the context of
global currency crises, particularly the East Asian Crisis. In India the
exchange rate system has undergone a paradigm shift from a system of fixed
exchange rate (until March 1992) to a market determined regime in March
1993. Since the switchover to a market determined exchange rate regime in
March 1993, the behaviour of the exchange rate has remained largely orderly,
interspersed by occasional episodes of pressures, which were relieved through
appropriate intervention operations consistent with the stated policy of
avoiding undue volatility in the exchange rate without reference to any target,
whether explicit or implicit. The financial crises encountered by the emerging
markets in the last decade have brought to the fore the importance of an
appropriate exchange rate policy. The present Indian regime of managed
flexibility that focuses on managing volatility without reference to any target
has gained increasing international acceptance and well served the
requirements of the country in the face of significant liberalisation of external
sector transactions. This is Balance of Palments and Trade Policy )))
particularly so in the context of the series of exchange rate crises experienced
by several emerging economies undertaking similar macroeconomic reforms.
In the post-Bretton Woods period, the Rupee was effectively pegged to a
basket of currencies of India's major trading partners from September 1975.
This system continued through the 1980s, though the exchange rate was
allowed to fluctuate in a wider margin and to depreciate modestly with a view
to maintain competitiveness. However, the need for adjusting exchange rate
became precipitous in the face of the external payments crisis of 1991.
Transition to Market Determined Exchange Rate System As a part of the
overall macroeconomic stabilisation programme, the exchange rate of the
Rupee was devalued in two stages by 18 per cent in terms of the US dollar in
July 1991. The transition to market determined exchange rate system took
place in two stages and the sequencing was based on the Report of the High
Level committee on Balance of Payments, 1993 (Chairman: c. Rangarajan).
The Liberalised Exchange Rate Management System (LERMS) instituted in
March 1992 was a dual exchange rate arrangement under which 40 per cent of
the current receipts were required to be surrendered to the Reserve Bank at the
official exchange rate while the rest 60 per cent could be converted at the
market rate. The 40 per cent portion surrendered at the official rate was for
meeting the essential imports at a lower cost. Although the experience with
the dual exchan Ee tate system in terms of volatility in the market determined
segment of the forex market was satisfactory, it involved an implicit tax on
exports and other invisibles receipts and thereby emerged as a source of
distortion. As a system in transition, the LERMS performed well in terms of
creating the conditions for transferring an augmented volume of foreign
exchange transactions on to the market. The unified market determined
exchange rate regime replaced the dual regime on March l, 1993 and since
then "the objective of exchange rate management has been to ensure that the
external value of the Rupee is realistic and credible as evidenced by a
sustainable curyent account deficit and manageable foreign exchange
situation. Subject to this predominant objective, the exchange rate policy is
guided by the need to reduce excess volatility, prevent the emergence of
destabilising speculative activities, help maintain adequate level of reserves,
and develop an orderly foreign exchange market" (Jalan, 1999)' In order to
reduce the excess volatility in the foreign exchange market, the 556 Indian
Ecoronl: Pefornance and Po/iciet Reserve Bank has undertaken market
clearing sale and purchase operations in the foreign exchange market to
moderate the impact on exchange rate arising from lumpy demand and supply
as well as leads and lags in merchant transactions. Such interventions,
however, are not governed by any predetermined target or band around the
exchange rate. The experience with the market determined exchange rate
regime has been satisfactory, although the exchange rate management had to
occasionally contend with a few episodes of volatility. The period from March
1993 till August 1995 was a phase of significant stability. Capital inflows
coupled with robust export growth exerted upward pressure on the exchange
rate. However, the Reserve Bank absorbed the excess supplies of foreign
exchange. In the process, the nominal exchange rate of the Rupee vis-d-vis the
US Dollar remained virtually unchanged at around Rs.31.37 per US Dollar
over the extended period from March 1993 to August 1995. The real
appreciation that resulted from the positive inflation differentials prevailing
during this period triggered off market expectations and resulted in a market
led correction of the exchange rate of the Rupee during September
1995-February 1996. In response to the upheavals, the Reserve Bank
intervened in the market and also resorted to monetary tightening so as to
restore orderly conditions in the market after a phase of orderly correction for
the perceived misalignu,ent. The period since 1997 has witnessed a number of
adverse internal as well as external developments. The important internal
developments include the economic sanctions imposed in the aftermath of
nuclear tests conducted during May 1998 and the border conflict during
May-June 1999. The external developments included, inter alia, the contagion
from the Asian crisis, the Russian crisis during 1997-98, sharp increases in
international crude oil prices in the period beginning with 1999, especially
May 2000 onwards, and the post-September 1l,2O0I developments in the US.
These developments created a large degree of uncertainty in the foreign
exchange market at various points of time, leading to excess demand
conditions in the market. The Reserve Bank responded through appropriate
intervention supported by monetary and other administrative measures like
variations in the bank rate, repo rate, cash reserve requirements, refinance to
banks, surcharge on import finance and minimum interest rates on overdue
export bills. These measures helped in curbing destabilising speculation, while
at the same time allowing an orderly correction in the value of the Rupee,
Balance of Paymentt and. Trade Policy >)/ FOREIGN EXCHANGE
RESERVES: APPROACH, DEVELOPMENTS AND ISSUES The subject of
foreign exchange reserves has received renewed interest in recent times in the
context of increasing globalisation, acceleration of capital flows and
integration of financial markets. The debt-banking-financial crises in several
countries have also necessitated the need for an international financial
architecture in which the management of foreign exchange reserves has
emerged as one of the critical issues. Contextually, the subject of foreign
exchange reserves may be broadly classified into two inter-linked areas,viz.,
the theory ofreserves and the management of reserves. The theory of reserves
encompasses issues relating to institutional and legal arrangements for holding
reserve assets, conceptual and definitional aspects, objectives for holding
reserve assets, exchange rate regimes and conceptualisation of the appropriate
level of foreign reserves. In essence, a theoretical framework for reserves
provides the rationale for holding foreign exchange reserves. Reserve
management is mainly guided by the portfolio management consideration, i.e.,
how best to deploy foreign reserve assets subject to statutory stipulations? The
portfolio considerations take into account inter alia, safety, liquidity and yield
on reserves as the principal objectives of reserve management. The
institutional and legal arrangements are largely country specific and these
differences should be recognised in approaching the critical issues relating to
both reserve management practices and policy-making (Reddy,2002). The
motives for holding reserves may be broadly classified under three categories,
viz., transaction, speculative and precautionary. International trade gives rise
to currency flows, which are assumed to be handled by banks driven by the
transaction motive. Similarly, speculative motive is left to individuals or
corporates. Central bank reserves, however, are characterised primarily as a
last resort stock of foreign currency for unpredictable flows, which is
consistent with precautionary motive for holding foreign assets. Precautionary
motive for holding foreign currency, like the demand for money, can be
positively related to wealth and the cost of covering unplanned deficit, and
negatively related to the return from alternative assets. Furthermore, foreign
exchange reserves are instruments to maintain or manage the exchange rate,
while enabling orderly absorption of international capital 558Irdian Econntl:
Perforttatce and Policiet flows. Official reserves are mainly held for
precautionary and transaction motives keeping in view the aggregate of
national interests, to achieve balance between demand for and supply of
foreign currencies, for intervention, and to preserve confidence in the
country's ability to carry out external transactions. The objectives for
maintaining reserves are: (i) maintaining confidence in monetary and
exchange rate policies; (ii) enhancing capacity to intervene in foreign
exchange markets; (iii) limiting external vulnerability by maintaining foreign
currency liquidity to absorb shocks during times of crisis including national
disasters or emergencies; (iv) providing confidence to the markets, including
credit rating agencies, that external obligations can always be met (thus
reducing the overall costs at which foreign exchange resources are available to
all the market participants); and (v) adding to the comfort of the market
participants, by demonstrating the backing of domestic currency by external
assets. India's approach to reserve management, until the balance of payments
crisis of 1991 was essentially based on the traditional approach, i.e., to
maintain an appropriate level of import cover defined in terms of number of
months of imports equivalent to reserves. For example, the import cover of
reserves shrank to three weeks of imports by the end of December 1990, and
the emphasis on import cover constituted the primary concern say, till
1993-94- The approach to reserve management, as part of exchange rate
management, and indeed the overall external sector policy underwent a
paradigm shift with the adoption of the recommendations of the High Level
Committee on Balance of Payments, 1993 (Chairman: C' Rangarajan). The
Committee had recommended that the foreign exchange reserve targets be
fixed in such a way that they are generally in a position to accommodate
imports of three months. In the view of the Committee, the factors that are to
be taken into consideration in determining the desirable level of reserves are:
(i) the need to ensure a reasonable level of confidence in the international
financial and trading communities about the capacity of the country to honour
its obligations and maintain trade and financial flows;