The UF governments second Budget will be remembered for many things, but it is perhaps only in the fullness of time that one of its true contributions "" the end of export pessimism and an altogether different approach to the assumptions underlying policy "" is identified by economic historians. For almost 35 years until 1991, Indias policy-makers laboured under the belief that it could not hope to be a major exporting nation and would, therefore, suffer perennially from a forex shortage. All policies between 1955 and 1991 were driven by this belief. An important consequence of this pessimism was the setting up of an elaborate bureaucratic machinery to guard precious foreign exchange. Instead of trying to augment it, the emphasis was on conserving it. Thus were the DGTD, Fera, and other clumsy devices created.
This is not to say that the 1997-98 Budget has addressed the problems related to export pessimism in specific terms. Far from it, as any exporter will tell you. Indeed, its objectives were altogether different. However, in its overall approach to important issues "" like the commitment to move to full convertibility, the dismantling of Fera, the substantial cut in tariffs in spite of intense lobbying by industry "" there is a world of difference. The timorousness of the past has been replaced by an altogether more assertive mindset with regard to the external face of Indias economy.
This is all to the good. The export pessimism of the 1950s was heavily influenced by policy-makers who argued that the exporters of primary goods would always lose out through deteriorating terms of trade, and that they would simply export their wealth for less and less in return. But nothing had happened between 1947 (when India had some 2.5 per cent of world trade) and the mid-1950s, when India decided it would not be an export-oriented nation, to warrant such pessimism. Yet, when the Second Plan was drawn up, it was based solidly on the belief that India would be faced simultaneously with a savings gap and a foreign exchange shortage. The former was sought to be addressed with the help of foreign aid in the Second Plan and with some bold and innovative policies later. But the foreign exchange gap remained an article of faith with the policy establishment until very recently.
The result was that when the smoke from the annual policy debates "" both internal and external to the government "" had cleared, there was often consensus on only one fact: the binding foreign exchange constraint. And, astoundingly, no effective policy measures were taken to remove it. Lip service and exhortations, there were aplenty. But the right policies? Forget it. It was as though a wicked magician had cast a spell on the policy-making establishment.
Dr Manmohan Singh argued a couple of years ago, that India had broken free from two constraints that had held it in chains for the best part of four decades: food and foreign exchange. He may yet be proved wrong on the food front, as India may have to import wheat this year. But on the foreign exchange front, things get better and better""despite the slowing down of export growth. The 1997-98 Budget underlines this confidence, and Mr Chidambaram has argued that food can be imported without difficulty, so long as the country has foreign exchange. It is adequate comment just now that the RBIs worry is how to sterilise the rupee flow into the system, should too many dollars flow into its coffers.