Exim Policy : Disturbing Bravado

Apr 4th 2000

Exim policy 2000 does indeed mark a watershed, though not for the reasons advanced by the Commerce Minister. It begins the one year stretch during which India plans to dismantle all remaining quantitative restrictions (QRs) on imports. The announcement declares what India has been forced to accept because of US intransigence with regard to permitting India to maintain some QRs for reasons of balance of payments vulnerability. Restrictions on 714 of the 1429 items still subject to regulation have been lifted as of April 1st, and those on the rest would go in a year from that date.
It is indeed true, as the Minister stated, that this is a continuation of the policy of dismantling QRs that has been characteristic of the liberalisation years. But what he failed to mention is that adding on another 1429 items to the free licensing list does not amount to a mere quantitative change. It marks a qualitative shift because these items remained regulated because they were among the most sensitive of imports, for three reasons. First, they include items, transactions in which affect the livelihood of the poorest of India's poor. From fishermen to farmers to quarry workers and those engaged in poultry farming. Second, they include commodities the production of which has been reserved for the small scale sector on employment and distributive considerations. Import liberalisation in these areas makes a mockery of reservation policy, since units shielded from competition from production by bigger units in the domestic tariff area are subjected to competition from imports, independent of the source of such imports. Producers of leather footwear and furnishing fabrics in the small scale sector are bound to be affected adversely. Finally, the list of 1429 includes a number of items for which there exists a pent-up demand among India's well-to-do, the release of which in the wake of this round of liberalisation would result not just in more conspicuous consumption, but consumption that would be more profligate in the use of foreign exchange than has been true hitherto.
The last of these features comes through from the fact that the Indian consumer can, for example, now access, if she/he so chooses, carrots, turnips, peas, pineapples, tamarind, watermelons and papaya from foreign locations through large agribusiness chains. She/he can also savour haddock, halibut, sole and plaice, even if at a price. The consumer is being provided with a mindboggling choice of imported fruit, spices, packaged food and office stationery. He can construct houses with imported Italian marble floors and imported brick and plaster the walls with imported wall paper. Last but not least he can have access to fully assembled, imported brands of modcons such as refrigerators, cookers, kitchen stoves, telephones, music systems and microwave ovens. In sum, this phase of import liberalisation holds out the threat of displacing domestic production and employment and of being wasteful in the use of foreign exchange to a far greater extent.
It is indeed true, as government spokesmen and sections of the media have been quick to point out, that protection is not provided by QRs alone. Tariffs matter too. However, liberalisation has affected the tariff regime as well. The peak rate of tariff on imports has declined from 355 per cent in 1991 to 35 per cent (plus the 10 pr cent surcharge) in this year's budget. The Reserve Bank of India estimates that the average rate of tariff has fallen from 71 per cent in 1993-94 to 35 per cent in 1997-98. Furthermore, there are a number of agricultural commodities in the list of 1429 for which the government had committed to binding tariffs at nil or at extremely low levels. Though as a quid pro quo for the removal of quantitative restrictions, these bindings have been renegotiated to levels going up to 60 and 80 per cent, there are a number of agricultural commodities, in whose case domestic producers remain vulnerable to competition from imports. In a period when many industries in the international market are burdened with overcapacity, resulting in efforts at dumping, a 35 per cent tariff can prove inadequate. And in those areas where tariffs have not merely been set, but bound by commitment, at much lower levels, a moderately high peak or average rate is no source for comfort.
There are, however, two major arguments that advocates of trade reform can fall back on. First, that despite liberalisation, imports have not been excessively buoyant in most years excepting two (1994-95 and 1995-96) during the 1990s. And, second, that in the wake of liberalisation India's balance of payments situation has improved considerably, with the trade and current account deficits being under control and capital flows contributing to a substantial buildup of reserves.
The first of these arguments needs to be treated with caution. The 1990s have been particularly volatile years as far as the unit price of one category of India's bulk imports is concerned, namely petroleum and petroleum products. As a result, as Chart 1 shows, the value of oil (and products) imports, which was more or less stable between 1990-91 and 1994-95, nearly doubled over the next two years (1995-96 and 1996-97), then fell sharply to close to its 1994-95 value during 1997-98 and 1998-99 and then rose by an almost equivalent amount in 1999-2000. These dramatic changes, in the midst of an almost consistent increase in the quantum of oil related imports, were the result of the sharp fluctuations in oil prices in recent years. This implies that any assessment of the impact of liberalisation on imports has to focus on trends in non-oil imports.

Chart 1 >> Click to Enlarge

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