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Block 1 IBO 4 Unit 1

India initially pursued an inward-looking and protectionist trade policy following independence to promote industrialization and self-sufficiency. This involved import substitution and restrictions on imports through licensing and tariffs. However, balance of payments deficits persisted. Major reforms began in the 1980s with some liberalization but the economy still faced crises. In 1991, widespread reforms were introduced as part of the New Economic Policy, including trade reforms. This shifted India toward an outward-looking stance with reductions in import restrictions and licensing, tariff reforms, and new export promotion schemes. India now follows a periodic trade policy framework with annual adjustments based on trading conditions.

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Megha Sharma
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129 views4 pages

Block 1 IBO 4 Unit 1

India initially pursued an inward-looking and protectionist trade policy following independence to promote industrialization and self-sufficiency. This involved import substitution and restrictions on imports through licensing and tariffs. However, balance of payments deficits persisted. Major reforms began in the 1980s with some liberalization but the economy still faced crises. In 1991, widespread reforms were introduced as part of the New Economic Policy, including trade reforms. This shifted India toward an outward-looking stance with reductions in import restrictions and licensing, tariff reforms, and new export promotion schemes. India now follows a periodic trade policy framework with annual adjustments based on trading conditions.

Uploaded by

Megha Sharma
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© © All Rights Reserved
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India’s Pre and Post Liberalisation Policy

Foreign Trade Policy

The analysis of foreign trade policies or trade policy as it is related to trade liberalization has
received a significant attention in the recent literature on international trade.
Foreign trade policy alternatively known as Export-Import (EXIM) policy refers to policies
adopted by a country with reference to export and imports.
In general, trade policy can be Protective trade policy or free trade policy
Protection is a policy of restriction of international trade, with the aim of preventing
unemployment or capital losses in industries threatened by imports, promoting particular
types of industrial development, affecting the internal distribution of income, or improving a
country’s terms of trade by exploiting its international monopoly power.
A protective trade policy pursued by a country seeks to maintain a system of trade
restrictions with the objective of protecting the domestic economy from the competition of
foreign products.
Protective trade policy constituted an important plank in the commercial policies of
underdeveloped countries during the 50s, 60s, and 70s and to some extent in the 80s. Many
of the underdeveloped countries continue to have protective trade policies even today
free trade policy is one which does not impose any restriction on the exchange of goods and
services between different countries. free trade policy is “absence a of tariffs, quotas,
exchange restrictions, taxes and subsidies on production, factor use and consumption
Foreign trade policy may be characterized as inward or outward looking. An inward looking
foreign trade policy stresses the need for a country to evolve its own style of development
and to be the master of its own fate, with restrictions on the movement of goods, services
and people in and out of the country. An inward looking foreign trade policy encourages the
development of indigenous technologies appropriate to a country’s resource endowment.
An outward looking foreign trade policy encourages not only trade but also the free
movement of capital, labours, enterprises and students a welcome to the multinational
enterprises, and an open system of communications like as ‘economic union’. Foreign trade
policy is an important economic instrument which can be used by a country, with suitable
modifications from year to year, to achieve its long- term goals.

India’s Trade Policy:


Pre-Independence
After independence India adopted trade policy of the colonial era for decades. Later India’s
trade policy was driven by perceived foreign exchange scarcities and the desire to ensure
that scarce foreign exchange is used only for significance purpose of economic
development. Industrialization and self-availability in important goods were the important
objectives of India’s trade policy.
Pre-Reform Trade Policy (1991)
The trade policy of India in the immediate post-independence period was liberal and was to
meet the demand released by Second World War. However, this import policy soon resulted
in a heavy deficit in balance of trade and government had to impose restrictions on imports
from hard currency area. The trade policies were modified from time to time while India
moved ahead (from 1st five-year plan onwards)
First five-year plan in the 1951-56:
in this plan period there was disequilibrium in the balance of payment of Rs.5877 million
due to increase in import bill over export earnings. During this period, there was no clear
foreign trade policy and import restrictions of any kind were not in use.
Second five-year plan (1956-61) :

heavy industries were established to achieve which target. The rapid rise in imports put
pressure on India’s balance of payments (Rs.18360 million). The Government of India
imposed quantitative restrictions on selective goods and government allowed imports to
particular industries through import licenses. Import substitution was stimulated while
exports were not considered a line of activity to be stimulated.

Third five-year plan (1961–66) :


Government continued quantitative restrictions on imports and actions were taken to boost
exports by creating a favourable atmosphere for export industries, diversification of their
markets and the development of export support services. In this period, import increased
further accentuating balance of payment problem (Rs.24146 million deficits).
During 1966-75 India’s economy faced many challenges. The government addressed these
problems by taking policy steps

 Devaluation of rupee
 Bank nationalization & enacting
 Monopoly & restriction on trade and practice (MRTP),
 Foreign exchange regulation act (FERA)
 Rupee was devalued (vis-à-vis US $) in June 1966 to systematize and rationalize the
export incentive system.
During this period, export subsidies were decreasing, export duties imposed, and import
duties were reducing. The net devaluation after allowing for these changes was, on an
average, less than the gross devaluation of 57.5 percent and varied among account was 21.6
percent for exports and 42.3 percent for imports. Consequently, the net effect was a further
stimulation of import substitution over export production
In 1975-85 : India’s Import allocation rules were made simpler. Protective quotas, however,
remained intact and domestic industry continued to completely shielded from competition,
like as closed Economy.

In April 1985, the government announced new Export-Import policy for a period of three
years. The objectives of policies (liberalization reached to privatization and globalization)
were to bring some stability to the policy and thereby reduce the uncertainty about year to
year changes that exports and imports faced. Although the stringency of the import regime
did not dilute substantially, the two three-year policies (1985-88 and 1988-91), did
represent some major simplifications. Due to unforeseen political changes, the second
policy was terminated one year earlier and the third policy, covering the period, April 1,
1990 to March 31, 1993, was announced by government of India, on March 30, 1990.

New Economic Policy (1991)


India continued to face balance of payment crisis in mid 80s and early 90s. The government
responded to the crisis by introducing economic reforms in the country. Reforms were
introduced in all major sectors like Industrial sector, financial sector, External sector and
Fiscal sector.
The Economic reform comprised wide ranging changes in trade policies, a part from
industrial policies. These policy changes aimed at strengthening export incentives,
eliminating a substantial volume of import licensing and optimal import compression.
Essential imports of sensitive item (such as POL and fertilizers) were fully protected, but
other imports of raw materials and components were linked to export performance through
enlargement and restructuring of replenishment licensing system.
Main features of trade policies (trade reforms) are as follows:
(a) Reforms in import licensing system or Quantitative restriction.
(b) Reforms in Tariff Structure.
(c) Decimalizations of Public Sector Trading Agencies. And
(d) Devaluation and Convertibility of Rupee on Current Account.
On the other hand, India has also used the trade policy to make export more competitive as
well as profitable. For this purpose trade policy provides for special schemes like
I. Export Promotion Capital goods Scheme (EPCG)
II. Market Access Scheme (MAI)
III. Exports Oriented Units (EOU),
IV. Export Processing Zones (EPZs) was replaced by Special Economic Zones (SEZs),
V. Focus Market Scheme (FMS)
VI. Focus Product Scheme (FPS),
VII. Agriculture Export Zones (AEZs)
VIII. Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange
management Act (FEMA)
India now (1991) follows a five-year trade policy, though some fine–tuning of policies is
made annually, depending on the evolving trading conditions and industry’s felt need, in
regard to regulation and liberalization of import and promotion & liberalization of
exports. The trade policies were modified from time to time while India’s new foreign
trade policy continues since 1992.

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