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Foreign Trade Policy and Balance of Payment

The document discusses India's foreign trade policy and balance of payments. It outlines the main features of India's early trade policy which focused on restricting imports and promoting exports. The policy went through several phases from 1947 to the 1990s. Major reforms in the early 1990s included increasing export incentives, abolishing import licenses for most capital goods and raw materials, and transitioning to a more liberal trade regime. The goals were to reduce barriers to trade and bridge balance of payments gaps through export promotion while managing current account deficits in a sustainable manner.

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56 views11 pages

Foreign Trade Policy and Balance of Payment

The document discusses India's foreign trade policy and balance of payments. It outlines the main features of India's early trade policy which focused on restricting imports and promoting exports. The policy went through several phases from 1947 to the 1990s. Major reforms in the early 1990s included increasing export incentives, abolishing import licenses for most capital goods and raw materials, and transitioning to a more liberal trade regime. The goals were to reduce barriers to trade and bridge balance of payments gaps through export promotion while managing current account deficits in a sustainable manner.

Uploaded by

rjvmafia
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 11

Chapter 10

Foreign Trade Policy and


Balance of Payment

Business Environment Chapter 10 Foriegn Trade Policy 1


and Balance of Payment
FOREIGN TRADE POLICY AND BALANCE OF
PAYMENTS
Advanced countries like Germany, the United States, Japan, and
others have used their trade policy to

(a) restrict their imports and provide a sheltered market for their own
industries so that they could develop rapidly and

(b)promote their exports so that their expanding industries could


secure foreign markets. In other words, trade policy has played a
significant role in the development of the advanced countries. India,
however, did not have a clear trade policy before independence,
though some type of import restriction—known as discriminating
protection—was adopted since 1923 to protect a few domestic
industries against foreign competition. It was only after
independence that a trade policy, as part of the general economic
policy of development, was formulated by India.
Business Environment Chapter 10 Foriegn Trade Policy 2
and Balance of Payment
MAIN FEATURES OF INDIA’S TRADE POLICY

(a) banning or keeping to the minimum the import


of non-essential consumer goods,
(b) comprehensive control of various items of
imports,
(c) liberal import of machinery, equipment, and
other developmental goods to support heavy
industry-based economic growth, and
(d) a favourable climate for the policy of import
substitution.

Business Environment Chapter 10 Foriegn Trade Policy 3


and Balance of Payment
PHASES OF INDIA’S TRADE POLICY

Five distinct phases in India’s trade policy can be noted as


follows:

• The first phase pertains to the period from 1947–48 to


1951–52;

•The second phase covering the period from 1952–53 to


1956–57;

•The third phase from 1957–58 to June 1966;

•The fourth phase started aft er devaluation of the rupee in


June 1966;

•And the last phase Chapter


Business Environmentaft er101975–76.
Foriegn Trade Policy 4
and Balance of Payment
MAJOR TRADE REFORMS
1. REP will become the principal instrument for export-related imports. To describe REP
as a licence is a misnomer. Hence, it will now be called “exim scrip” and can be freely
traded.

2. All exports will now have a uniform REP rate of 30 per cent of the FOB value. Th is is a
substantial increase from the present REP rates, which vary between 5 per cent and 20
per cent of FOB value.

3. The new REP scheme gives a maximum incentive to exporters whose import intensity is
low. For example, agricultural exports, which earlier had very a low REP rate of 5 per
cent or 10 per cent, will now gain considerably.

4. All supplementary licences shall stand abolished except in the case of the small-scale
sector and for producers of life-saving drugs/equipment. Th ese two categories will be
entitled to import both under OGL or through supplementary licences.

5. All additional licences granted to export houses shall stand abolished. However, export
houses will enjoy a REP rate of 30 per cent of FOB value, and will be granted an
additional REP rate of 5 per cent of FOB value.

Business Environment Chapter 10 Foriegn Trade Policy 5


and Balance of Payment
6. All items now listed in the Limited Permissible List. OGL items would,
hereafter, be imported through the REP route.

7. The exim policy contains a category known as Unlisted OGL. This


category stands abolished and all items falling under this category may be
imported only through the REP scheme.

8. Advance licensing has been an alternative to the REP route for obtaining
imports for exporters. It is expected that many exporters will find the REP
route more attractive now. However, for exporters who wish to go through
advance licensing, this route will remain
open. The e REP rate for advance licence exports is being increased from
10 per cent of NFE (net foreign exchange earnings) to 20 per cent of NFE.

9. In three years’ time, our objective will be to remove all import licensing for
capital goods and raw materials, except for a small negative list.

10. The goal of the government is to decanals all items, except those that
are essential.

Business Environment Chapter 10 Foriegn Trade Policy 6


and Balance of Payment
11.In the light of the substantial liberalisation of the trade
regime, and also the recent changes in exchange rates
(aft er devaluation), cash-compensatory scheme (CCS)
was abolished from July 3, 1991.

12. In order to make this system more transparent and free,


it is proposed that financial institutions may also be
allowed to trade in exim scrips.

13. In three–five years, the Commerce Minister hoped that


the rupee will become fully convertible on the trade
account.

Business Environment Chapter 10 Foriegn Trade Policy 7


and Balance of Payment
ASSESSMENT OF THE NEW TRADE POLICY

• The New Trade Policy (NTP), 1991 aimed to cut down


administrative controls and barriers, which act as
obstacles to the free flow of exports and imports. The
basic instrument developed by the policy is the exim
scrip in place of REP licences. The purpose of this
instrument is to permit imports to the extent of 30 per
cent on 100 per cent realisation of export proceeds.

• Obviously, the purpose is to bridge the BOP gap.

• The trade policy has streamlined various procedures for


the grant of advance licences, as also permit imports,
through exim scrips routes.

Business Environment Chapter 10 Foriegn Trade Policy 8


and Balance of Payment
CURRENT ACCOUNT DEFICIT (CAD)
• CAD mirrors the saving–investment gap in the national income
accounts and, thus, constitutes foreign savings.

• The challenge before the emerging market economies is to leverage


foreign savings, and to promote domestic growth without having the
long-term consequences of external payment imbalances.

• CADs, per se, need not necessarily enhance the productive capacity
and, thus, overall the GDP growth. This would depend on the
underlying component factors that are leading to the CAD.

• The distinction between gross capital infl ow and net inflow is useful.
As the latter must equal the CAD, there is no way in which the net
use of foreign savings can increase without an increase in the CAD.

Business Environment Chapter 10 Foriegn Trade Policy 9


and Balance of Payment
CAPITAL ACCOUNT DEFICIT

• Capital inflows can be classified by

1. Instrument (debt or equity),

2. Duration (short term or long term), and

3. Nature (stable or volatile) of flows.

• Such taxonomy helps to calibrate the policy of liberalisation of the


capital account.

Business Environment Chapter 10 Foriegn Trade Policy 10


and Balance of Payment
Business Environment Chapter 10 Foriegn Trade Policy 11
and Balance of Payment

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