EVOLUTION OF INDIAN FOREIGN TRADE POLICY

EVOLUTION OF INDIAN FOREIGN TRADE POLICY

Since the beginning of the British rule, India’s foreign trade policy has only focussed on catering to the interests of the already advancing Britain rather than those of our own country. But the post-independent India decided to rectify these mistakes soon after its independence.

India’s five-year plans (FYPs) highlighted the import substitution policy under India’s inward-looking strategy. This meant that the goods that can be produced domestically should be produced domestically rather than importing from the foreign market. The domestic producers could thus sell their products in the Indian markets without any foreign competition. The main aim here was to boost the economic growth of the nation and achieve self-sufficiency. Such an economy is also known as a closed economy. Up until the 1990s, India chose to remain as a closed economy.

The system of import substitution and import restrictions was implemented with the help of a number of different methods through the imposition of a) Tariffs, b) Quotas.

Extremely high tariffs were levied on imported goods making them very expensive for the Indian consumers. This eventually forced them to buy goods that have been made domestically rather than the imported items.

The quota system led to the fixing the maximum limit on the imports made by a domestic consumer. Only a certain amount of very essential items such as raw materials and capital equipment were allowed to be imported and used. That means, if the producers wanted extra materials, they had to fend for themselves.

No doubt that the inward looking strategy brought a rise in the foreign trade sector with the domestic producers gaining exponentially but towards the early 1990s, the Indian law makers realised that there are many loopholes in the current foreign trade policy that they adopted. The main problem was that the domestic producers made no sincere efforts to step up the quality of their products, forcing the Indian consumers to purchase whatever was supplied by them.

In 1962, a review committee was formed to discuss the changes required in the government’s existing foreign trade rules and hence, in 1985, then Finance Minister V.P. Singh announced the EXIM Policy (short for Export-Import Policy) which formulated the export and import policies of the country. Initially, the policy was meant to be followed for a period of three years. Later from 1991, the policies were revised every 5 years in view of the changing international economic context. The EXIM policy came into being to get a better view of the trade situation of the country and to correct trade deficits, if any.

In the year 1991, India received a major setback. The Indian government availed a loan of $7 billion from the IMF (International Monetary Fund) and the World Bank due to its inability to manage the economic condition of the country. In order to avail the loan, these international agencies expected India to liberalise, privatise and globalise its economy. The Indian government thus announced the New Economic Policy (NEP), popularly known as the LPG (Liberalisation, Privatisation, Globalisation) policies. Under the New Economic Policy, quantitative restrictions that were imposed after independence were substantially removed. For example, by the year 2001, import restrictions on manufactured consumer goods and agricultural products were completely eliminated. Similarly, tariffs were removed to a great extent in order to increase the competitiveness of the domestic goods in the foreign markets and to improve the quality of the products.

The first EXIM policy came into effect in 1992 and was effective until 1997. This policy aimed at removing the various protectionist measures that were taken by the Indian government previously. After that, the second EXIM policy started in the same year (1997) and stayed up until 2002. This time the focus was on making India a globally oriented economy through the adoption of a set of schemes such as the Export Promotion Capital Goods Schemes and Advanced License Schemes aimed at increasing investments from abroad. The next EXIM policy emerged after 2 years i.e. in 2004 up to 2009 (major trade decisions were taken under this EXIM policy which is why it is also called the ‘Trade Constitution’), under which newer policies such as Target Plus which focussed on providing incentives to producers and exporters with duty-free credit and Free Trade Zones. Soon after, the fourth EXIM policy came into effect from 2009 till 2014 which brought in new initiatives known as Focus Market scheme and product market scheme to help exporters compete in foreign markets and incentivise the export of those products which have high employment intensity. The fifth EXIM policy came after one gap year and came into effect in 2015 and stayed till 2020. This policy focussed on the export as well as the manufacturing services to improve the ease of doing business to increase India’s exports and thus increase its participation in the global market.

Fig 1. Imports of goods and services (% of GDP) – India | Source: World Bank

Fig 2. Exports of goods and services (% of GDP) – India | Source: World Bank

Fig 3. India’s Top Trade Partners | Source: Department of Commerce, Government of India

On March 31, 2020, the Government of India decided to extend the Foreign Trade Policy 2015-2020 for one year in light of the Covid-19 situation. It was to expire on March 31, 2021, but the Directorate General of Foreign Trade (DGFT) again extended FTP 2015-20 up to September 30, 2021, and it has been operational since.

References:

  1. Arora, S. (2019). What are the objectives of Foreign Trade Policy in India? Legodesk. https://legodesk.com/legopedia/foreign-trade-policy-india/
  1. India’s International Trade Policy – EXIM Policy. Economics Discussion. https://www.economicsdiscussion.net/international-economics/indias-international-trade-policy-exim-policy/4241
  1. Soares, N. (2014). Foreign Trade Policy of India since 1980. Slideshare. https://www.slideshare.net/NikhilSoares/foreign-trade-policy-of-india-since-1980
  1. Saluja, N. (2021). Govt extends current foreign trade policy till September. The Economic Times. https://m.economictimes.com/news/economy/foreign-trade/govt-extends-current-foreign-trade-policy-till-september/amp_articleshow/81777971.cms
Arati Jose

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