A Comparative Analysis of the Performance of The Indian Economy in the External Sector -

Pre Reform and Post Reform Era

APORUPA SENGUPTA, ST. XAVIER’S COLLEGE, KOLKATA

Submitted On: 20th December, 2020

Accepted On: 28th December, 2020

Published On: 21st January, 2021

Abstract: The Indian trade sector went through ample changes during its history of economic reforms. India transformed from an inward-oriented, export pessimistic nation, to a more open, market-oriented global economy, post-liberalization policies. The paper aims at establishing a comparative review of India’s accomplishments throughout the years, pre-and-post-reform.

A special focus has been given to comparing ‘self-reliance’ in the pre-reform period (‘Atma-Nirbhar Bharat Abhyan’) that was announced by Indian Prime-Minister, Mr. Narendra Modi on 12th May 2020 amidst the Covid-19 ‘pandemic pandemonium’, as a special economic package of Rs. 20 lakh crore (which is approximately equivalent to 10% of India’s GDP).

Keywords:  Trade, EXIM policies, Self-reliance and Self-Sufficiency, ISI, Export pessimism, New Economic Reforms, LPG scheme, Export promotion, Atma-Nirbhar Bharat.

JEL Classification: N00, F10, F13, F60, O19, O38

Introduction: 

Foreign trade of a country depends on many exogenous factors, but the EXIM (Export-Import) policies of the home country play a major role in its performance. Though theoretical efforts had begun much earlier, 1950 marks the official start of economic planning in India, with the Economic Planning Commission on 15th March 1950, with Prime Minister Jawaharlal Nehru as the Chairman. 

The Pre-reform period in India extends from 1950 to 1990, as starting from June 1991 onwards, India started with its economic reforms. Thereafter, from 1991 onwards, till the current date, we have the Post-Reform Era. While the pre-reform era heavily relied on import-substitution, the post-reform era was more outward-oriented. There is no doubt that the evolution of EXIM policies in India was dynamic. The current EXIM Policy (2015-20) concentrates on increasing India’s market share for the current market scenario, as well as exploring new markets for new products. 

Literature Review:

Many Indian and non-Indian economists have provided valuable insights into the trade policies followed by India throughout the pre-reform and post-reform periods. Writings by Bhagwati and Srinivasan (1970), Panchmukhi (1978), and Krueger (1985) provide a foundation of studies for this paper. According to Bhagwati and Srinivasan (1975), the industrialization policies followed by India during the pre-reform period protected domestic industries from international competition but led to excessive or inappropriate state intervention in the market resulting in high cost and low growth in the Indian economy. Prasad (1997) examined the impact of economic reforms on exports of India and concluded that during 1990-1991 to 1994-1995, India experienced a high growth compared to growth rates of world exports. Veeramani (2007) gives a comparative study of India’s export potential across the two periods, while Rajesh Mehta’s (1997) works on trade policy reforms focusing more on India’s policy adoptions, post-reform. Arvind Panagriya (2004), in his various papers also presents an elaborate discussion on India’s external sector policies. In his paper, he mentions that according to Garry Pursell (1992), data on the Indian external sector, though incomplete, out-of-date, and inconsistent, stands as evidence of a steady liberalization policy that was adopted post-19776. Panagriya commended the impact of economic reforms on India’s external sector but called for further reforms particularly in the trade sector. Papers by Roy et al. (2012) are also relevant. Ramaswamy (1999) analyzed India’s external sector and attributed its neglect to the restricted international linkages of industrial firms and production. Thus, quite a few studies have been performed by different researchers and scholars to study the impact of, and comment on economic reforms on India’s external sector.

TRADE POLICIES IN THE PRE-REFORM PERIOD

Right after Independence, India’s trade policy was primarily inward-looking, because concentration was given on the sustained growth of the Indian Economy. India was more focused on ‘Import Substitution Industrialisation’ (ISI) during the 1950s, as it was expected to overcome coordination failure and break the vicious trap of poverty and underdevelopment prevalent in India, and at the same time, it would promote India’s self-reliance on the production front. Severe import restrictions were imposed on the Indian economy starting from 1956-57 and continued till about the 4th Five Year Plan (FYP).

The Nehruvian Trade Policies

The three FYPs under the tenure of Jawaharlal Nehru were heavily based on pre-independence visions of a self-reliant economy, modeled upon the Soviet socialist planning. Import tariffs were imposed to protect infant indigenous industries. The idea was to establish domestic industries (that produce import substitutes and indigenous commodities) and reduce foreign trade dependency, thereby saving scarce foreign exchange for the import of essential commodities only. However, studies by Bhagwati and Srinivasan (1970), Krueger (1985), and Panchmukhi (1978) explained that ISI had not lived up to its expectations and with that, a growing need for export promotion was felt. But no such initiates were taken up that could represent a change in India’s attitude towards export, as explained by Krueger. This could be attributed to the mid-‘60s crisis that India was going through, successive droughts, Indo-Pak wars, and Sino-Indian wars. In the ‘70s, the main concern was the long gestation period of import-replacement projects and utilization of the existing production capacities. However, an inclination towards export promotion was already brewing in the air.

By the late ‘70s, India adopted a pro-market orientation, liberalizing economic activities, which was partly responsible for an upsurge in Gross Domestic Product (GDP). This mentality was reinforced by the International Monetary Fund (IMF) when due to the macroeconomic crisis of the ‘80s, the IMF laid stress on export promotion as a pre-condition of loan giving; and also as a measure for correcting the Balance of Payment (BOP) deficits, as compared to import-substitution. In 1979, a thirteen-member “Tandon Committee” was appointed, which submitted its reports in 1981. It recommended various measures for the export promotion that could increase India’s share in world trade from 0.5 % to 1 % by 1990-91. Throughout the 50 years of the pre-reform period, the composition of exports also changed. Manufacturing products replaced agricultural and allied products, as the latter faced competition from countries like Sri Lanka and East Africa.  

Bimal Jalan classifies India’s export policies in the pre-reform era into 3 distinct phases:

  1. Phase I (up to the first oil shock in 1973) was primarily based on export pessimism.

  2. Phase II (1973 to 6th FYP) saw the rising priority of exports by economic policies, and exports increased.

  3. Phase III (6th-7th FYP) incorporated exports as an integral part of industrial development strategies.

1. Trade (% of GDP).JPG

I. TRADE POLICIES IN THE POST-REFORM PERIOD:

The advent of economic reforms, under the name of ‘New Economic Reforms’, allowed India to appreciate the Liberalization- Globalization- Privatization (LPG) scheme. On 30th April 1990, a new EXIM policy was adopted for a 3-year period, nullifying the previous policy. Throughout the reform period, these policies underwent a series of changes to welcome a more rational regime, open under the global regime. The withdrawal of Quantitative Restrictions (QRs), rationalized reduction in tariffs, duty-free imports, and market-based exchange rate system attempted to correct the earlier anti-export bias. A ‘New Export Strategy’ was also announced on January 2, 1998, that targeted an annual export of $90 billion by 2002. Other measures included decanalisation of import and export items; establishment of Special Economic Zones (SEZs) and complementary Export Oriented Unit (EOU) scheme, agri-export zones (AEZs); devaluation and convertibility of rupee on the current account, etc16. India’s increased participation in the global market can be traced to a rise in trade to GDP ratio, as given in the diagram below. (Data taken from the World Bank, accessed on 10th October 2020.)

2. Export of G&S.JPG

II. COMPARISON OF THE TRADE POLICIES:

Empirical studies for countries like Korea, Taiwan, Thailand, and Malaysia, and “fairly robust” results, explain that export-oriented policies can prove to be better, or at least, has the potential to be better in certain developing countries, than ISI strategies. According to Veeramani, India’s actual export growth rates in the post-reform years have exceeded the potential offered by the global demand, when compared to the relatively sluggish export growth rate in the pre-reform era; and this gap is explained by an increased competitive ambiance for the Indian economy. The adjacent diagram uses data from the World Bank, accessed on 10th October, to justify the trend of growth rate in exports over the years under consideration. Export growth rate rose from 8% per year in 1993-94 to 21% per year in the next decade, continuing on the rise in the pre-financial crisis period of 2002-03 to 2008-09, followed by an obvious slump during the crisis, and subsequently recovering to 37% per year in 2010-11, and 33% per year in the first 8 months of 2011-123. Veeramani also mentions that other factors may have contributed to the accelerated growth rate in merchandise export and that exports have been negatively affected by real effective exchange rate appreciation in the recent years of post-reform period. In contrast, Rajesh Mehta, in the abstract of his paper on Trade Policy Reform writes that external competitiveness after the post-reform period was not significant, and that shift towards Asian markets explains the increase in India’s exports. 

 

Data from the World Bank (Data Bank- World Development Indicators) shows that exports and imports increased starkly, post-reform. Although exposure of the Indian economy was to improve the BOP imbalance, World Bank data shows the opposite, imports still exceed exports. Alternative methods have been advised by Tendulkar and Bhavani (2007) in terms of exchange rate adjustment, as a better option than import controls to manage the balance of payments deficits. So self-reliance essentially failed in improving the BOP condition in India.

3. Exports-Imports.JPG
4. Comp Panel.JPG

The adjacent diagram given originates from the data given in the Yearbook of International financial statistics; (Various issues) published by the International monetary fund (IMF) Washington D.C. U.S.A, as mentioned in a paper by Amandeep Kaur. 

While comparing India's standpoint in the global market during the pre-reform era and post-reform era, we can bring into the limelight, the idea of ‘Atma-Nirbhar Bharat Abhyan’. The term ‘Atma-Nirbhar Bharat Abhyan’ literally translates from Hindi, to ‘self-dependent India mission’. LiveMint in an article in May translated the term to ‘self-sufficiency’. In pre-reform India, the main concern was to convert India into a self-reliant economy. So the question arises:

Do the idea of self-reliant India in the Pre-reform period and the Atma-Nirbhar Bharat in the Post-reform Covid-19 scenario converge into a single entity?

Though Atma-Nirbhar Bharat aims at making India "a bigger and more important part of the global economy"15, the goal of the scheme should not be to shun global trade. There were indeed concerns that this could merely be a renaming of the ISI strategy. Sanjeev Sanyal, Principal Economic Adviser, Government of India, mentioned in the Indian Express that many people even misinterpreted it as ‘Nehruvian import substitution or autarkic isolationism’. Law and IT manager, Ravi Shankar Prasad mentioned that self-reliance is not equivalent to isolation, and by no means does it discourage FDI investments or technology. PM Modi explained that the scheme intends to boost the economic potential of India, targeted towards the cottage industries, MSMEs, etc. which act as a source of millions of Indians.  

Looking back, the self-reliance policy adopted by Nehru and Indira Gandhi in the 70s-80s, did not succeed as (Hindu) growth rate was merely 3.5%, and the incidence of poverty doubled in 30 years after independence. As per Indian Express, strictly speaking, the Indian economy had shifted from the concept of self-sufficiency to self-reliance from the 3rd FYP (1961-66), though, even after that, India’s fascination with self-reliance did not fade away, as the 9th FYP (1997-2002) had a veiled idea of self-reliance as well.

However, unlike Nehru’s protectionism policies, schemes under Atma-Nirbhar Bharat encourage private investment, Research, and Development (R&D). The plan is not to avoid technology or globalization, but to build up the domestic industries through a streamlined governance system, without using aids or concessions. In that sense, it can be thought of as a manifestation of M.K. Gandhi’s ‘Swadeshi’

According to Swaminathan Aiyar, as an economy ranked 68th in Global Competitiveness Index by the World Economic Forum, the Indian government should make a clear distinction between the ‘self-reliance’ in the context of whether it means ultra-protectionism; or strengthening the economy by increasing production and lowering production costs, thereby becoming more competitive in the international market and attracting inflow of foreign investments. Naturally, if India adopts a path towards the self-reliance of the pre-reform era, calling it a suicidal decision would probably not be an exaggeration.

Conclusion:

 

While there are of course certain political intricacies involved, the authority must remember that imports and exports go hand in hand. A nation cannot keep existing in the global value chain, and will surely be met with equivalent drops in export demand if it continuously cuts imports. The government must rationally justify its decision to attempt to reduce dependence on Chinese imports, banning Chinese apps, making approval for Chinese investments mandatory, or any other country for that matter, because these countries can also act as a potential marker for Indian goods. Again this brings us to international relation economics, without which study of EXIM policies falls empty.

Atma-Nirbhar Bharat stands on the five pillars of “economy, infrastructure, technology, vibrant demography, and demand”. Considering it hasn’t even been a year since the announcement of the policy, nothing can be said with certainty as to the trajectory that this program will lead India towards. Numerous government decisions are being made with the Atma-Nirbhar Bharat in mind, such as altering the definition of MSMEs, increasing FDI in the defense sector, and attempting to establish self-reliance in many domestic indigenous industries, such that dependence on imports can be somewhat reduced. Complementary schemes like ‘Make in India’ (2014) and ‘Innovation Challenge’ (launched on July 4, 2020) are still being added, which also pave the course of the Atma-Nirbhar Abhyan. As there are still adjustments being made to the scheme, one can only hope that as the plan promises, India can one day assume a valuable position in the international frontier.

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  4. Mehta, Rajesh. "Trade Policy Reforms, 1991-92 to 1995-96: Their Impact on External Trade." Economic and Political Weekly (1997): 779-784.

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