MacroScan - The Medium Term Exim Policy, 2002-07

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 >>

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 >> Chart 3 >> Chart 4 >>