There
is no question that a medium-term strategy for trade
policy is generally to be welcomed. Obviously, exporters
and importers, as well as producers of import substitutes,
would prefer (even require) some degree of policy
stability in order to make plans and investments.
But even the government needs to have a medium-term
plan and framework in mind – indeed, the whole purpose
of five-year planning was precisely that, to ensure
not just consistency of strategy across various sectors
but also a vision over the medium term.
So, the Commerce Ministry's decision to announce a
medium-term Exim Policy, valid until 2007, is a positive
step. Unfortunately, however, the Policy announced
does not show adequate vision for the medium term
period, apart from declaring very ambitious goals
in terms of targets to be fulfilled. It is not very
clear about the mechanisms through which these targets
are to be achieved, and tends to fall back instead
on the hoary (and mistaken) belief that unshackled
private initiative will be sufficient to meet the
goal of much higher export growth. Therefore it is
unlikely that this will prove more successful than
other such policy steps of the recent past, which
have been associated with decelerating exports and
greater import penetration in important sectors of
the economy.
The
external trade context
First,
let us examine the overall context within which the
new Exim Policy has been announced. It comes after
a decade of very drastic policy changes with respect
to both imports and exports since 1991. It is well
known that the external sector – in the form of a
balance of payments crisis in 1990-91 – was the proximate
cause of the push towards neo-liberal economic reform
that dominated the 1990s. In addition, the orientation
of the economic reform programme was largely external,
in terms of attempting to make the Indian economy
more "competitive" in international trade
terms.
The explicit goals of the economic reform strategy
with respect to the external sector, were to create
a major shift in the momentum of export growth, and
to attract very large inflows of foreign capital (particularly
in the form of export-oriented FDI) to augment domestic
savings and therefore allow much higher rates of gross
domestic investment. In actual fact, the reform process
accomplished neither of these objectives by the turn
of the decade.
Rather,
as we have argued in earlier editions of Macroscan,
it involved rates of export expansion more or less
similar to those of the past, caused much greater
import penetration in manufacturing and therefore
particular pressure on employment-intensive small-scale
industries, and made the economy as a whole much more
dependent upon volatile short term capital inflows
without really increasing the total inflow of foreign
capital in relation to GDP.
The
relative lack of success on the export growth front
is evident from Chart 1. This shows that the rate
of growth of exports over the 1990s was only marginally
higher than it has been in the earlier decade, and
was substantially lower than was achieved during the
bad old "closed economy" days of the 1970s.
Chart
1 >> Click
to Enlarge
Chart
2 shows that imports have grown faster and outstripped
export growth over the 1990s. This has meant a substantial
increase in the trade deficit, as shown in Chart 3.
This reached a peak of nearly $13 billion in 1999-2000.
This amounted to 4 per cent of GDP, as apparent from
Chart 4. Even by the end of the decade, the trade
deficit was higher than 3 per cent of GDP.
Chart
2 >> Click
to Enlarge
Chart
3 >> Click
to Enlarge
Chart
4 >> Click
to Enlarge
