In sum, the post-1996 evidence pointing to a slowing of import growth despite liberalisation provides little cause for comfort. It by no means suggests that there is no relationship between liberalisation and import flows. Rather it suggests that signs of a strong positive relationship during the 1993-94 to 1995-96 period was diluted by lower oil prices, by a recession in industry and by a fall in the unit value indices of imports. The decline in oil prices has been dramatically reversed over the last year. Recession is too high a price to pay to sustain a viable trade deficit. And as and when world growth revives and transnational firms get a foothold in the domestic market, unit value indices would turn firm.
 
All this is of special concern because, despite these "benefits", export performance has been so poor that the trade deficit has tended to widen precisely in the years of slower import growth (Chart 2). The Commerce Minister has argued that it is this problem, rather than US pressure to do away with QRs, that his exim policy announcement has sought to address. However, it hardly bears stating that the "new" measures announced amount to little more than mere rhetoric. Besides further minor changes in import procedures, the only initiatives incorporated in the announcement is the creation of a set of "special economic zones" inspired by the Chinese experience and the decision to provide incentives to the states to help contribute to the export effort.

Chart 2 >> Click to Enlarge
 
The special economic zones are to be export enclaves into which duty free imports are to be permitted and in which foreign investors are permitted to set up firms with up to 100 per cent equity holding. In practice this would merely amount to the creation of larger sized free trade zones, as is reflected in the fact that two such proposed FTZs are to be converted in SEZs. Past experience with the free trade zones has been dismal. And with growing liberalisation of trade and rules governing foreign investment, the distinction between firms located in such special zones and those operating out of the domestic tariff area have been increasingly diluted.
 
Above all, what this initiative assumes is that an export drive has to be FDI driven. The expectation is that India should not just attract foreign direct investment, but relocative FDI, which chooses India as a site for world market-oriented production. In practice, foreign investors have hitherto contributed little to the export effort and in many cases have not even met their export commitments under schemes such as the Export Promotion Capital Goods Scheme, which permits capital imports on concession terms in return for a promise to meet certain export targets. Further, if we examine the kind of FDI flow into India in the wake of liberalisation, we find that it consists of three types: that which has come in to increase the equity stake of the foreign partner in exiting joint ventures from the 40 per cent level mandated by FERA to levels up to 100 per cent permitted in the wake of liberalisation; second, that which has come to acquire India firms with a large share of the market in certain products, a case epitomised by the acquisition of Parle by Coca Cola; and third, that which has come into the infrastructural (non-tradable) sector, in response to the generous concessions offered by the government. It should be clear that a lot of these inflows are not even into greenfield projects and all of them are targeted at the domestic rather than the export market. There is no reason to expect a shift from such FDI inflows to more export-oriented flows in the current world environment, where internationally competitive capacities can be acquired at bargain prices in East Asian countries going through a "restructuring" process. In fact, what is likely is that even FDI targeted at the domestic market would shrink, as happened last financial year, since post-liberalisation that market can be serviced with imports from abroad.