On the right trail

In part I, we had a brief look at trade policy and its pattern in the period just preceding the independence. We also covered trade policy and the pattern and structure of trade in the first six plans. In this article, we will do so for the seventh to twelfth plans.

Trade policy during seventh to twelfth five-year plans

In the seventh plan (1985-90), one of the important components of trade policy was to step up the growth rate of exports. The seventh plan’s prescription was not to look at exports as a separate ‘enclave’ but integrated into the overall policy framework. The plan document stated: “the Seventh Plan postulates the integration of export policy with all policies and programmes that affect productivity and costs. In this context, special attention needs to be paid to the scale of operations and to the reform of the system of taxation of inputs with a view to reducing costs”. From a base of around Rs 10,000 crore in 1984-85, exports were projected to rise to Rs 13,831 crore in 1989-90. The components of exports were expected to be largely the same, namely, tea, cotton textiles and garments, iron ore, gems and jewellery, leather and leather goods, engineering goods and chemicals & allied products. Imports, on the other hand, were expected to grow at 5.8 per cent, the bulk of which were the usual suspects of fuel and fertilisers. Edible oils were also expected to be a major item of imports. Total exports for the seventh plan were projected at Rs 60,700 crore and total imports Rs 95,400 crore, leaving a balance of trade of Rs 34,700 crore. A part of this deficit was to be met by invisibles of Rs 14,700 crore (which mostly comprised remittances), leaving a current account deficit of Rs 20,000 crore. This was to be financed by foreign aid and external borrowings. As it turned out, the fears of trade and current account deficit were well-founded and India had to approach the World Bank/IMF for a loan of Rs 6.7 billion to finance the deficit.

In the eighth plan (1992-97), as we know, the economic liberalisation measures were unfolding. One of the focus areas of these reforms was the trade and external sector. During this plan period, exports went up from Rs 44,042 crore in 1991-92 to Rs 1,18,817 crore in 1996-97. This export performance was impressive and easily surpassed the target of Rs 83,869 crore in 1996-97. However, imports also rose at a faster rate because of a sharp fall in tariffs which came into force because of the liberalisation policies. Imports rose from Rs 47,852 crore in 1991-92 to Rs 1,38,920 crore in 1996-97, as did the trade deficit from Rs 3,800 crore in 1991-92 to around Rs 20,100 crore in 1996-97. Significantly, it was during this plan that the Uruguay Round was concluded and the Marrakesh Agreement was signed on April 15, 1994, which committed all signatories to more liberal trade and created the World Trade Organisation (WTO).

In the ninth plan (1997-2002), the South-East Asian financial crisis unfolded, which led to a sharp rise in debt in ASEAN countries and spread to Korea, Japan and China. The IMF had to step in with a USD 40 billion aid to stabilise the currencies of Thailand, Korea and Indonesia. All this led to a slowdown in growth and dampened foreign trade as well. In India, there was little impact, with exports showing a rising trend (in rupee terms) all through the plan. Imports rose at an even faster rate, which led to an even higher trade deficit at the end of the plan in 2001-02 as compared to the end of the eighth plan. The earnings from invisibles however rose, which helped to get a small surplus on the current account in 2001-02. In 1996-97, exports were USD 35,006 million and fell to USD 33,219 million in 1997-98. In the following two years, exports showed a strong growth, rising from USD 36,822 million in 1998-99 to USD 44,560 million in 2000-01 before falling slightly to USD 43,827 million in 2001-02. This was mainly due to further trade liberalisation and depreciation of the rupee. However, imports rose even more because of the rise in global fuel prices. Imports surged from USD 41,484 million in 1997-98 to USD 51,413 million in 2001-02. This left a trade deficit of USD 7,856 million. Levels of trade deficit in the ninth plan were much higher than in the eighth plan. Net Invisibles (mainly remittances from abroad and services trade) showed a strong increase during the ninth plan, rising from USD 10,007 million in 1996-97 to USD 14,054 million in 2001-02, which left a small surplus on the current account in 2001-02. The horrible terrorist attack on the twin towers took place in New York on September 11, 2001, which would impact trade in the coming years.

The tenth plan (2002-07) had much more to say about trade and exports in particular. In the opening chapter (para 1.48), it emphasised the importance of exports in keeping the current account deficit in check. This was because imports were bound to rise because of higher growth and on account of import liberalization, as committed at the WTO. It also stated that export growth would be important for boosting aggregate demand, because with a rise in savings rate expected (and therefore lower domestic consumption), the growth in aggregate demand would have to come from external markets. The impact of September 11 attacks continued during this plan and hit software exports from India to the US. As a result, the RBI put together an incentive package to promote large-value exports. The projected exports during the tenth plan were targeted to increase from USD 44,915 million in 2001-02 to USD 80,419 million in 2006-07, indicating a growth rate of 12.4 per cent. The actual numbers were much higher: exports rose from USD 52,719 crore in 2002-03 to USD 1,26,414 million in 2006-07. As for imports, these were projected to increase on account of tariff cuts being undertaken progressively. Two scenarios were painted in the tenth plan document: if tariffs fell to 15 per cent by 2006-07, total imports would increase from USD 57,618 million in 2001-02 to USD 1,32,058 million by 2006-07, indicating an annual growth of 18 per cent. And if

tariffs fell to 18 per cent, the imports would rise to USD 1,22,846 million by 2006-07, i.e., an annual increase of 16.3 per cent. Actual imports rose by much more: from USD 60,412 million in 2002-03 to USD 1,85,735 million in 2006-07. Net invisibles continued to show a strong growth, rising to USD 23,716 million in 2006-07, but the current account ended up in a deficit in the last year of the plan. The average annual trade deficit during the tenth plan was USD 33.2 billion, which was four times that of the ninth plan deficit of USD 8.4 billion.

In the eleventh plan (2007-2012), both exports and imports continued to grow. Exports were projected to grow at 20 per cent per annum and imports at 23 per cent per annum. As a result, exports were to increase from USD 127.1 billion (13.9 per cent of GDP) in 2006-07 to USD 316.2 billion (22.5 per cent of GDP) in the last year of the plan. Imports were projected to rise from USD 192 billion to USD 540.5 billion during the eleventh plan. This massive trade balance of USD 224.3 billion was financed partly by the surplus in invisibles of USD 190 billion (mainly trade in services), which would reduce the current account deficit to 2.4 per cent of GDP. It may be recalled that the global financial crisis, which originated in the US property market, was witnessed during this plan period. The effects lasted long as a global slowdown lasted for years, which affected Indian trade as well.

In the twelfth plan, merchandise exports were projected to grow to 16 per cent of GDP and rise to USD 570 billion by the end of the plan in 2017. Merchandise imports were projected to rise to 25 per cent of GDP by 2017, which meant that the trade deficit would be 9 per cent of GDP in 2017. On the invisibles or services account, there was expected to be a positive balance of 3.5 per cent (which was higher than the 3.2 per cent of the eleventh plan) and remittances were to be 3.4 per cent of GDP by the end of the plan. This translated to a current account deficit of 3.4 per cent of GDP for the twelfth plan.

Conclusion

As seen from the above discussion, India’s trade has expanded since the first five-year plan and risen sharply since the turn of the century. A lot of it had to do with the economic liberalisation and the reforms of 1991, which had reduced average tariffs sharply. Since the tenth plan, India’s economy has rapidly integrated with the rest of the world with merchandise exports at 11.7 per cent of GDP, merchandise imports at 15.7 per cent of the GDP and net service exports (services exports less services imports) at 2.1 per cent of GDP. These figures were 14.4 per cent, 22.7 per cent and 3.2 per cent for the eleventh plan, respectively. In 2020, these figures stood at 16.1 per cent,

19.6 per cent and 6.5 per cent of GDP, indicating even more integration into the world economy. The other remarkable feature has been the sharp rise in services trade since 1999-2000, and with the recent policy of ‘China + 1’ and ‘derisking’, India stands to gain further. Indeed, India’s policies such as the Production Linked Incentive (PLI) and the Foreign Trade Policy of 2023 — where new schemes such as Amnesty Scheme for exporters to close old pending authorisations, Towns of Export Excellence Scheme, the recognition of exporters through the Status Holder Scheme and simplification of Advance Authorisation and EPCG schemes — are steps in the right direction.

To be continued next Sunday…

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