Considering the severe foreign exchange crunch, the first Budget announced a restrictive trade policy, allowing free import of only foods, essential consumer goods, capital goods and raw materials. Non-essentials like luxury goods were prohibited. The rest were subject to import licensing. This policy continued till the mid-1970s, even as the nation went through ambitious five-year plans to industrialise, state enterprises gaining a dominant position, surging population growth and three debilitating wars in 1962, 1965 and 1971 that boosted defence expenditure.
In the early ‘70s, through nationalisation of major banks, flow of credit to agriculture, small scale industries and businesses dramatically increased, decisively driving entrepreneurship, transforming the economy and altering the distribution of wealth. By the mid-70s, import and export policies were slowly liberalised but essentially, the restrictive trade policy and high import duties continued to shield domestic producers from competition, unwittingly protecting inefficiencies and low productivity. The government started encouraging export through access to duty-free import of inputs, the export-oriented units scheme, cash compensatory support, concessional export credit, income tax exemptions, free trade zones, etc. However, through the ‘80s, export remained subdued due to an overvalued currency and systemic inadequacies, especially in infrastructure.
Liberalisation of the economy started in July 1991, with two-stage devaluation of the rupee, followed by a dual exchange rate eight months later and a unified exchange rate a year thereafter. The rate better reflected realistic rupee value, duty rates were brought down and import licensing abolished for most items. Structural adjustment of the economy and easier foreign investment norms brought more private investment, more competition and greater efficiencies. The schemes to import capital goods at lower duty against export obligations and a value-based advance licensing scheme got bigger businesses interested in export and competing in international markets. Trade barriers in most countries started coming down with the advent of the World Trade Organization and its rules-based trading system, boosting international trade.
The all-round productivity gains, due to the reforms initiated since 1991 and the advent of information technology, mobile phones and the internet, played out during 2003-10, when merchandise and services export grew dramatically. Meanwhile, income tax exemptions were withdrawn for exporters, except in Special Economic Zones. In the past few years, export growth momentum has dissipated due to weaker global trade growth. Of late, a strengthening rupee and the policy of asking exporters to pay taxes upfront and take refunds later threaten to adversely impact export growth.
As we reflect on this I-Day and look ahead, hopes are pinned on better infrastructure, revival of global trade growth and a more supportive policy to boost export and, thereby, better employment opportunities for our youth. Wish you all a Happy Independence Day.
E-mail: tncrajagopalan@gmail.com
