The Foreign Trade Regime: Analytical Phases and Changes Over time

J. Bhagwati and A. Krueger, in their comparative analysis of the impact of foreign trade regimes and economic development , defined a set of phases in which an exchange control regime may be found.

Phase I: During this phase, quantitative restrictions (QRs) on international transactions are imposed, in response to an unsustainable balance of payments deficit. Phase II: While QRs continue to be intense, various measures are undertaken to offset some of the undesired results of the system. LIKE Heightened tariffs, surcharges on imports, rebates for exports, special tourist exchange rates. However, QRs continue to be relied upon as the primary means for controlling the balance of payments deficit.

Phase III: An attempt is made to systemize the changes introduced during Phase II. This phase often starts with a formal exchange rate and may be accompanied by removal of some of the surcharges and other special measures imposed during Phase II and by reduced

reliance upon QRs.. The country may signal the beginning of withdrawal from reliance upon QRs.

Phase IV: A favourable response in the form of increased foreign exchange earnings would encourage a gradual relaxation of QRs. The relaxation may take the form of either changes in the nature of QRs or increased foreign exchange allocations, and thus reduced premiums.

Phase V: The exchange regime is fully liberalized. There is full convertibility on current account,
and Quantitative Restrictions are no longer employed.

Indias Foreign Trade Regime

1950-1956 : Phase 4
There was a good harvest at this time Almost an Equilibrium in Balance Of Payments.

There were no Quantitative Restrictions.

1956-1962 : Phase 1
Focus on heavy industries for which 2nd Five Year Plan was initiated It led to severe Balance Of Payments crisis in 1957. The Government imposed a regime of Quantitative Restrictions on imports. These QRs were selective. The purpose was to promote Domestic Import substitution Industry.

1962-1966 : Phase 2
Export Subsidization was introduced in 1962 primarily to offset the penalties that the QR regime was in effect imposing on exports. Two Exogenous Events had major economic consequences :

India-Pakistan War and A major drought in the Agriculture year 1965/66, which affected traditional exports
adversely and increased the need for food imports.

The impact of increase in Import Duty and Export Subsidization was nearly the same as that of Devaluation of Rupee. India asked for foreign aid from World Bank & IMF . The aid was given on the condition that India cuts down on various restrictions on Imports.

1966-1968: Phase 3

First attempt at Liberalization was made in the form of Devaluation of Rupee by 57.5% ( from Rs 4.76 to Rs 7.50 per U.S dollar )

India faced another severe drought in 1966-1967.

Impact of these Droughts are as follow : 1. Price Rise. 2. Lack of Agricultural Raw Material 3. And Industry Recession.

Revaluation had to Abandoned because of lack of Political support.

1968-1975: Phase 2
Export Subsidies started again and increased further. Industrial licensing became more severe Several Exogenous shock during this period : 1.

Bangladesh-India War :

The refugee inflow that preceded it created severe economic strains.

2.

Adverse weather Condition

during the 1972-1975 period led to stagnant agricultural output and double digit Inflation for two years in a row in1972-73 and 1973-74.

3.

Collapse of fixed exchange regime

Wood system.

under Bretton

Initially, Indian rupee was made flexible according to British Pound. The British Pound depreciated against U.S Dollar which resulted in depreciation of Rupee against U.S Dollar. This resulted in scarcity of foreign exchange and higher tariffs.

1975-1985: Phase 3
1) Improvement in foreign exchange earnings. Higher remittances from Indian workers in West Asia. Due to a decline in public Investment and slow industrial Growth, less foreign exchange was needed. Increase in Production of Wheat & Rice , therefore, less food Imports. Relaxation in the severity of the QR regime. Productive Quotas, however, remained intact . The second Oil Shock in 1979 was less severe because of substantial increase in workers remittances and partly because of the fortuitous discovery and development of significant offshore Oil Deposits.

1985- Mid -1991: Phase 3

The government announced that the import and export policy was to cover a period of 3 years rather than 6 months pr a year as in the past. This innovation was meant to bring some stability to the policy Until 1988, there were 250 public notices regarding changes in the policy. Open General License for capital goods increased from NIL in 1975 to over 1,100 items in the 1988-1991 policy. Similarly, intermediary goods were put in the OGL category Many of the items put under the OGL were noncompetitive imports .

Also, import of some items formally in OGL catergory was restricted on other ground.

Mid 1991 Present : Phase 4

July 91 A set of major reforms were announced by Narsimha Rao Government.

Reasons for these Reforms

Crisis in the economy that was both acute and different from anything experienced in the post-independence era Drastic fall in the foreign exchange reserves to a level not even close enough to pay for three week of Imports. A near default in the colossal external debt of over US$71 billion A fiscal deficit of nearly 9 % of the GDP Realization that Indias economic development strategy since 1950 & the regulatory framework created to implement failed miserably.

Rao-Singh Reforms of 1991/1992

Rupee Devaluation , Abolition of Import Licensing, Replacement of Cash Subsidies Industrial Licensing abolished except for investment in 18 Industries Relaxation of restrictions on large industrial houses under Monopolies and Restrictive Trade Practices Act Easing of entry requirements for direct foreign investment Allowance of Private investment in some Industries hitherto reserved for public sector investment.