Previous trade policies can help avoid pitfalls

In a couple of days, we will celebrate our 72nd Independence Day. A brief look at the trade policy in the last seven decades can help us avoid the pitfalls in the road ahead.

In the early years, the policy was to curb imports for conspicuous consumption to help cope with dwindling foreign exchange reserves. In the fifties, import licensing was introduced and high import duties were levied with a view to protecting domestic producers. Imports of essential capital goods and inputs were allowed through licences issued with bilateral or multilateral grants or loans financing them. Agreements with the Soviet Union and East European countries were made for payment for imports in non-convertible rupees. Restrictions on imports of consumer goods continued and foreign exchange for current account payments was rationed. Hardly any attempts were made to promote exports. Consequently, smuggling and hawala trade (i.e. black market) in foreign exchange became very attractive. The rupee went through a massive 57 per cent devaluation in 1966.

In the seventies, feeble attempts to promote exports started and gained steam in the eighties. A strong rupee and high subsidies for exports were maintained but that did not help. Big companies focused on domestic markets and only small businesses exported labour-intensive products like garments and handicrafts. The import policy continued to be restrictive and foreign exchange was scarce. The policy of high protection to domestic producers resulted in inefficiency, smuggling, corruption and loss of competitiveness, leading to a severe foreign exchange crisis in 1991. Meanwhile, the cost of three expensive wars and increased spending on the social sector cut the fiscal space for building essential infrastructure.

Liberalisation was launched in July 1991 with a two-stage devaluation of the rupee, abolishing export subsidies, industrial licensing and import licensing for most items, and easing foreign exchange restrictions. Import duty rates were brought down and export promotion schemes rationalised. With a slow removal of restrictions on foreign investment and technology acquisition, more investments came in and existing industries modernised, bringing in more efficiency and competitiveness. With a weaker rupee, exports surged and foreign exchange reserves also rose.

In the last few years, with inflation targeting taking centre stage and hot money flowing into the bourses, the rupee has strengthened. Consequently, imports have gone up and exports have gone down, hurting domestic producers. To revive flagging exports, more subsidies are being given. To discourage imports, customs duty rates have been raised on many items and more antidumping and safeguard measures are being taken. In short, the direction of policy is towards the pre-liberalisation days of high import duties, a stronger rupee and more export subsidies. Meanwhile, defence expenditure, administrative expenses and spending on the social sector have gone up, reducing the fiscal space for expenditure on development. Private investment has been rather tepid. With more automation, fewer jobs are being created. The saving grace is that subsidies on petroleum products have been pruned, thanks to lower oil prices and some of the subsidies are being better targeted with notable reduction in leakages.

Going forward, it is necessary to recognise the limits of protectionism. The policy of maintaining a stronger rupee, higher import duties and more export subsidies has not helped us in the past. It is unlikely to help us in the days ahead.