Eying inwards

India’s development history tells us that she had adopted a policy of import substitution, rather than export promotion, since the first five-year plan. This was supposed to integrate better with the efforts at creating a heavy industry base and achieving self-reliance. However, this changed after the sweeping economic reforms of 1991 which encompassed not only industrial licensing, but also the external sector, wherein tariffs fell and the economy became more open. In this two-part article, we will see how India’s trade policy has evolved through the five-year plans. In this article, we will give a brief glimpse of trade policy in the pre-independence period and cover the first six plans. We will take up seventh to twelfth five-year plans in the next part. In the third and final part, we will discuss the direction and pattern of India’s foreign trade through the five-year plans.

Trade policy in pre-Independence period

When India became independent, the pattern and structure of trade was one of a colony. The bulk of India’s exports were raw materials and imports were those of finished manufactured products. But as we have noted in the above articles, it was not always like that. In the 17th and 18th centuries, India was a major exporter of textiles, silk and spices. Beginning in 18th century, the British systematically destroyed the textile industry of India by increasingly raising tariffs on Indian imports. The British also mandated only British ships to be used in any goods imported into their country, which was again disadvantageous for Indian traders. This has been illustrated by many authors, the earliest being Dadabhai Naoroji in his book ‘Poverty and UnBritish Rule in India’, which was published in 1901, wherein he had propounded his drain of wealth theory. This has also been detailed in recent books by William Dalrymple’s ‘The Anarchy’ and Thomas Piketty’s ‘A Brief History of Equality’.

Before the second world war, India was forced to export more than its imports to meet the interest on sterling loans and salaries of the British officers. During the war, India continued to export to Britain, without any corresponding export from the UK because of the war. This led to the build-up of sterling balances of almost Rs 1700 crore in 1946. India mostly exported raw jute, raw cotton and tea and manufactures from jute and cotton, and ran a surplus in balance of trade till 1947-48.

Trade in the first six five year plans

In the first two plans, while exports stagnated in the range of Rs 600-700 crore per annum, imports shot up on account of the industrialisation programme, which included the setting up of steel plants, expansion of railways and finishing of projects which had been started. There was, however, no separate trade policy except the general exhortation to raise exports and limiting balance of payments deficit to the available foreign exchange resources. At the end of the second plan, the average annual balance of trade deficit was Rs 467 crore. Also, India’s share in world exports fell from 2.1 per cent in 1950 to 1.1 per cent in 1960. During the first two plans, the UK was our largest trading partner, followed by the USA.

In the third plan (1961-66), the average annual exports were Rs 747 crore and average annual imports were Rs 1,224 crore, which meant a balance of trade deficit of Rs 477 crore. The imports were mainly on account of machinery, equipment and technology, rising defense needs due to the wars, and food grains imports because of a failed monsoon in 1965-66. As we saw in the article on the third plan, food was imported from the USA under PL480. In the third plan, export objectives were laid out, which included: reducing domestic consumption to raise export surpluses, raising competitiveness of export industries, diversification of exports and developing new export markets. Towards the end of the third plan, the rupee was devalued by a massive 57 per cent (falling from Rs 4.76/USD to Rs 7.5/USD) because of the high inflation, high spending due to the war, and a persisting balance of payments deficit. In terms of composition of trade, there was a significant change: while the primacy of tea, cotton textiles and jute goods continued, their share fell from 48 per cent at the beginning of the plan to 44 per cent in 1966. New export items such as engineering and chemical goods also emerged. During this period, the Board of Trade, Export Promotion Councils and the Minerals and Metals Trading Corporation were set up to promote exports.

In the fourth plan (1969-74)), there was a thrust on development of ports and upgradation of existing ones. A number of incentives to promote exports were also announced, mainly in modernisation of manufacturing units and support for replantation of tea bushes and better packaging facilities. The after effects of the devaluation of 1966 continued in the first two years of the fourth plan, and the balance of trade was positive in 1972-73. However, the sharp rise in fuel prices towards the end of the plan pushed up the import bill. As a result, even though exports rose to a record high of Rs 2,523 crore, imports also rose to Rs 2,955 crore in 1973-74, leaving a trade deficit of Rs 432 crore.

In the fifth plan (1974-79), the balance of payments came under stress from the beginning itself because of the four-fold rise in fuel prices, but recovered later because of a strong export growth of 18 per cent in 1975-76, and a rise in remittances from abroad. The share of three major import items — fuel, fertilisers and food — rose to 53.2 per cent in 1974-75 from 42.6 per cent in the previous year. While exports also increased, it wasn’t enough, and there was a deficit of around Rs 1,190 crore in 1974-75 and Rs 1,229 crore in the balance of trade by 1975-76. On the strength of rising exports, 1976-77 saw a surplus on the balance of trade before going into deficit at the end of the plan. While new markets in the EU, Eastern Europe and the USSR were developed, India’s imports kept growing. The focus continued to be on import substitution, and some export promotion measures in areas of engineering goods, handloom, coir and handicrafts were taken.

In the sixth plan (1980-85), the stated policy was to continue with the policy of import substitution, but along with export promotion. However, efficient import substitution was stressed upon, i.e., which would help the balance of payments and contribute to GDP growth. As per the plan document, the trade deficit in 1979-80, or the first year of the plan, was estimated at Rs 2,370 crore, which was projected to rise to Rs 3,972 crore by the end of the plan. The actual numbers were, however, worse because the hefty import bill and the trade deficit were touching Rs 6,000 crore in all the years of the plan before falling to Rs 5,390 crore in 1984-85. Imports were projected to rise from Rs 8,790 crore in 1979-80 to Rs 13,850 crore in 1985, and exports from Rs 6,420 crore to Rs 9,878 crore during the same period. The actual import numbers were much higher, ranging from Rs 12,549 crore in 1980-81 to Rs 17,134 crore in 1984-85, as were the export numbers, which ranged from Rs 6,711 crore in 1980-81 to Rs 11,744 crore in 1984-85. In addition, there was a projection of Rs 5,889 crore of external aid. Even with all this, the balance of payments at the end of the plan was expected to be negative, which would have to be met from foreign exchange reserves and additional capital inflows from abroad (including commercial borrowings).

Conclusion

India’s trade policy in the first six plans was one of import substitution, which was necessitated by the goal of self-reliance. Tariff levels of India were high, which were meant to protect and promote domestic industry, and exports were seen as a means to earn foreign exchange reserves to pay for our imports. Export promotion as a means of growth and generating employment, which was actively pursued by Korea, Taiwan, Hong Kong and Singapore (or the ‘gang of four’), was missing in India’s trade policy. As we shall see in the next article, India’s trade policy started changing in the later plans, particularly after the 1991 economic reforms and liberalisation, when tariffs were slashed and services trade started gaining prominence from 1999-2000 onwards.

To be continued next Sunday…

The writer is Addl. Chief Secretary, Dept of Mass Extension, Education and Library Services, Govt of West Bengal.