MacroScan (Printable Version) - Exim Policy : Disturbing Bravado

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.

A close look at Chart 1 shows that in fact starting from the adjustment-induced trough in 1991-92, non-oil imports have risen continuously, excepting for the years 1997-98 and 1999-2000. The trend, however, has been for the rate of increase in non-oil imports to drop from their rather high level in the years preceding 1996-97 to lower levels in subsequent years (Chart 7). This tendency comes through even more sharply if we exclude from imports, not just of oil and oil products, but that category of imports which are related to exports (Chart 6). However, despite the deceleration in non-oil and non-export related imports, the import-GDP ratio, which rose from 7.3 per cent in 1989-90 to 10.2 per cent in 1995-96 has remained more or less at that level in subsequent years (Chart 3).

There appear to be three factors underlying the slower rate of expansion of imports in the years since 1996-97. First, the recession in the industrial sector has resulted in the fact that demand for capital goods, intermediates and components has decelerated substantially. As is well known, after three years of creditable performance (1993-94 to 1995-96), the rate of growth of industry has slipped dramatically, with signs at most of a modest recovery in recent times. This, as has been argued in this column earlier, was largely the result of an initial post-liberalisation release in the pent-up demand for a range of import-intensive commodities, especially consumer durables. With this once-for-all demand having been satiated, industrial growth rates tended to slump, with the modest recovery in recent times being related to the effects of the implementation of the Pay Commission's recommendations, a credit-fuelled expansion in demand (as in the case of automobiles) and some improvement in agricultural performance. Needless to say, in a period when the import intensity of domestic production and consumption has been rising, the recessionary tendency would have immediately affected the demand for imports. Not surprisingly, the turning point in industrial growth during the 1990s also corresponds to the turning point in import growth rates.

The contribution of this element to import trends is reflected in the composition of imports as well. Thus: (i) the share of non-bulk imports in total imports have been falling since 1996-97 (Chart 4); (ii) the value of capital goods imports has fallen quite significantly since 1995-96, pointing to the role that flagging investment has had on import trends (Chart 5); and (iii) within capital goods, the contribution of project goods and non-electrical machinery has been squeezed the most, corroborating the assessment of the role of falling investment.

Second, liberalisation has been characterised by an increase in the number of products for which imports account for a dominant share of input and capital costs. In any year, the quantum of imports of such commodities depends on the expectations of future growth in demand. When demand is expected to be buoyant, large orders for imports are placed and stocks built up so as to be able to service the expected increase in demand. However, if expectations are not realised, leading to an unintended accumulation of stocks of intermediates and components, imports in subsequent years fall dramatically. Not only do existing stocks have to be cleared, but expectations of future demand are also dampened resulting in this outcome. There is reason to believe that this was precisely what happened in the wake of the industrial "mini-boom" during 1993-94 to 1995-96. The euphoria generated by that sudden jump in demand led to wild expectations of market potential and a sharp increase in imports. Non-oil imports rose by 30 and 28 per cent respectively in 1994-95 and 1995-96, as compared with 12 and 11 per cent in 1992-93 and 1993-94, and then fell by 0.2 per cent in 1996-97. Thus part of the deceleration in non-oil imports after 1995-96 was the result of the bunching of imports in earlier years because of misplaced expectations.

Finally, India's non-oil import bill in recent years has been kept down by a fall or low growth of import prices. This is particularly true of 1996-97 when the value of non-oil and non-export-related imports fell by 3.9 per cent. In that year, the unit value index of food products fell by 26.5 per cent, that of crude materials by 6.7 per cent, of vegetable and animal oils and fats by 3.6 per cent, of chemicals by 9.8 per cent and of manufactured goods by 2.2 per cent. This fall in unit value persisted in 1997-98 in the case of chemicals and manufactured goods. There are signs that a similar fall in unit values have influenced import values in the last financial year. The reasons for the fall in prices are well known. World trade growth slowed substantially in 1996-97, providing the spur for the East Asian crisis. The competition that set off resulted in firms saddled with excess capacities virtually dumping their products in international markets. While this delivered a benefit in the form of a lower import bill, it also intensified the competition being faced by domestic producers in the wake of liberalisation. It was therefore a mixed blessing.

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.

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.

As for the drive to involve the states in the export effort, it is based on the presumption that their lack of interest derives from the fact that export projects which contribute to employment generation do not yield any revenues for the state government. This presumption is belied by the fact that even less industrialised states like Kerala are making a major effort at enhancing software exports and attracting international tourists. What is no doubt true is that under the current system of revenue devolution and given recent trends in taxation and subsidy reduction at the centre, the states are facing a major fiscal crunch, leaving little resources for sustaining their current plans. In that context, the Rs.250 crore set aside as support for an export effort at the State level is laughable. What the Commerce Minister should have learnt from the Chinese experience is the need to substantially reduce the centralisation characterising the Indian economic system, which would increase the manoeuvrability of state governments and provide them the space to experiment with measures aimed at exploiting the opportunities offered by the world market.

Thus, the export thrust of the new policy is of no consequence. But the import liberalisation it incorporates is. What encourages the present government to keep on this track is the "comfortable" foreign exchange position of the Reserve Bank of India. During the first nine months of the last financial year, reserves rose by $2.8 billion. This was because while the current account deficit in that period totalled $3.5 billion, net inflows on the capital account amounted to $6.4 billion. This included $1.7 billion in the form of portfolio flows and 1.5 billion in the form of non resident deposits. That is, all of the reserve increase was the result of "hot money flows", in as much as they can be withdrawn at any time. This experience corresponds with a tendency that has been going on for some time, and has accelerated in recent times. Given that, the reserves position does not reflect balance of payments strength, but a kind of weakness.

These signs of weakness are of significance because they occur in a context when many of the advantages of the mid-1990s are waning. Oil prices have touched new highs and are unlikely to fall too much in the wake of the recent OPEC decision to increase production by a small amount. Remittances from Indian's abroad which rose dramatically from $2.1 billion in 1990-91 to $12.4 billion in 1996-97, have fallen by over $2 billion by 1998-99. And the desperate bid of East Asian countries to use exports as the basis for a recovery is increasing competition in world export markets. This is a time which is least propitious from the point of view of launching policies that enhance vulnerability.

What remains is the argument that the Commerce Minister had no choice but liberalise given India's commitments as a member of WTO. There are a number of points to be made here. First, if the liberalisation of imports is unavoidable, then it is best to declare that, rather than celebrate the process as an indication of strength and present it as a means to export-led growth, as the exim policy statement does. Second, inasmuch as the policy can adversely affect growth and the balance of payments, the government should realise that in the course of the WTO negotiations, India had made too many concessions on trade liberalisation and tariff binding, receiving little in return in areas like textiles. A demand to correct for this situation needs to be repeatedly made and consistently fought for. Finally, efforts should be made to use other means, such as anti-dumping measures to protect domestic producers and the balance of payments, which requires emphasising the dangers and not the presumed benefits of liberalisation. The fact that the Commerce Minister has chosen not to emphasise these options is indeed disconcerting.



Themes > Features	04.04.2000


Exim Policy : Disturbing Bravado

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. A close look at Chart 1 shows that in fact starting from the adjustment-induced trough in 1991-92, non-oil imports have risen continuously, excepting for the years 1997-98 and 1999-2000. The trend, however, has been for the rate of increase in non-oil imports to drop from their rather high level in the years preceding 1996-97 to lower levels in subsequent years (Chart 7). This tendency comes through even more sharply if we exclude from imports, not just of oil and oil products, but that category of imports which are related to exports (Chart 6). However, despite the deceleration in non-oil and non-export related imports, the import-GDP ratio, which rose from 7.3 per cent in 1989-90 to 10.2 per cent in 1995-96 has remained more or less at that level in subsequent years (Chart 3). There appear to be three factors underlying the slower rate of expansion of imports in the years since 1996-97. First, the recession in the industrial sector has resulted in the fact that demand for capital goods, intermediates and components has decelerated substantially. As is well known, after three years of creditable performance (1993-94 to 1995-96), the rate of growth of industry has slipped dramatically, with signs at most of a modest recovery in recent times. This, as has been argued in this column earlier, was largely the result of an initial post-liberalisation release in the pent-up demand for a range of import-intensive commodities, especially consumer durables. With this once-for-all demand having been satiated, industrial growth rates tended to slump, with the modest recovery in recent times being related to the effects of the implementation of the Pay Commission's recommendations, a credit-fuelled expansion in demand (as in the case of automobiles) and some improvement in agricultural performance. Needless to say, in a period when the import intensity of domestic production and consumption has been rising, the recessionary tendency would have immediately affected the demand for imports. Not surprisingly, the turning point in industrial growth during the 1990s also corresponds to the turning point in import growth rates. The contribution of this element to import trends is reflected in the composition of imports as well. Thus: (i) the share of non-bulk imports in total imports have been falling since 1996-97 (Chart 4); (ii) the value of capital goods imports has fallen quite significantly since 1995-96, pointing to the role that flagging investment has had on import trends (Chart 5); and (iii) within capital goods, the contribution of project goods and non-electrical machinery has been squeezed the most, corroborating the assessment of the role of falling investment. Second, liberalisation has been characterised by an increase in the number of products for which imports account for a dominant share of input and capital costs. In any year, the quantum of imports of such commodities depends on the expectations of future growth in demand. When demand is expected to be buoyant, large orders for imports are placed and stocks built up so as to be able to service the expected increase in demand. However, if expectations are not realised, leading to an unintended accumulation of stocks of intermediates and components, imports in subsequent years fall dramatically. Not only do existing stocks have to be cleared, but expectations of future demand are also dampened resulting in this outcome. There is reason to believe that this was precisely what happened in the wake of the industrial "mini-boom" during 1993-94 to 1995-96. The euphoria generated by that sudden jump in demand led to wild expectations of market potential and a sharp increase in imports. Non-oil imports rose by 30 and 28 per cent respectively in 1994-95 and 1995-96, as compared with 12 and 11 per cent in 1992-93 and 1993-94, and then fell by 0.2 per cent in 1996-97. Thus part of the deceleration in non-oil imports after 1995-96 was the result of the bunching of imports in earlier years because of misplaced expectations. Finally, India's non-oil import bill in recent years has been kept down by a fall or low growth of import prices. This is particularly true of 1996-97 when the value of non-oil and non-export-related imports fell by 3.9 per cent. In that year, the unit value index of food products fell by 26.5 per cent, that of crude materials by 6.7 per cent, of vegetable and animal oils and fats by 3.6 per cent, of chemicals by 9.8 per cent and of manufactured goods by 2.2 per cent. This fall in unit value persisted in 1997-98 in the case of chemicals and manufactured goods. There are signs that a similar fall in unit values have influenced import values in the last financial year. The reasons for the fall in prices are well known. World trade growth slowed substantially in 1996-97, providing the spur for the East Asian crisis. The competition that set off resulted in firms saddled with excess capacities virtually dumping their products in international markets. While this delivered a benefit in the form of a lower import bill, it also intensified the competition being faced by domestic producers in the wake of liberalisation. It was therefore a mixed blessing. 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. 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. As for the drive to involve the states in the export effort, it is based on the presumption that their lack of interest derives from the fact that export projects which contribute to employment generation do not yield any revenues for the state government. This presumption is belied by the fact that even less industrialised states like Kerala are making a major effort at enhancing software exports and attracting international tourists. What is no doubt true is that under the current system of revenue devolution and given recent trends in taxation and subsidy reduction at the centre, the states are facing a major fiscal crunch, leaving little resources for sustaining their current plans. In that context, the Rs.250 crore set aside as support for an export effort at the State level is laughable. What the Commerce Minister should have learnt from the Chinese experience is the need to substantially reduce the centralisation characterising the Indian economic system, which would increase the manoeuvrability of state governments and provide them the space to experiment with measures aimed at exploiting the opportunities offered by the world market. Thus, the export thrust of the new policy is of no consequence. But the import liberalisation it incorporates is. What encourages the present government to keep on this track is the "comfortable" foreign exchange position of the Reserve Bank of India. During the first nine months of the last financial year, reserves rose by $2.8 billion. This was because while the current account deficit in that period totalled $3.5 billion, net inflows on the capital account amounted to $6.4 billion. This included $1.7 billion in the form of portfolio flows and 1.5 billion in the form of non resident deposits. That is, all of the reserve increase was the result of "hot money flows", in as much as they can be withdrawn at any time. This experience corresponds with a tendency that has been going on for some time, and has accelerated in recent times. Given that, the reserves position does not reflect balance of payments strength, but a kind of weakness. These signs of weakness are of significance because they occur in a context when many of the advantages of the mid-1990s are waning. Oil prices have touched new highs and are unlikely to fall too much in the wake of the recent OPEC decision to increase production by a small amount. Remittances from Indian's abroad which rose dramatically from $2.1 billion in 1990-91 to $12.4 billion in 1996-97, have fallen by over $2 billion by 1998-99. And the desperate bid of East Asian countries to use exports as the basis for a recovery is increasing competition in world export markets. This is a time which is least propitious from the point of view of launching policies that enhance vulnerability. What remains is the argument that the Commerce Minister had no choice but liberalise given India's commitments as a member of WTO. There are a number of points to be made here. First, if the liberalisation of imports is unavoidable, then it is best to declare that, rather than celebrate the process as an indication of strength and present it as a means to export-led growth, as the exim policy statement does. Second, inasmuch as the policy can adversely affect growth and the balance of payments, the government should realise that in the course of the WTO negotiations, India had made too many concessions on trade liberalisation and tariff binding, receiving little in return in areas like textiles. A demand to correct for this situation needs to be repeatedly made and consistently fought for. Finally, efforts should be made to use other means, such as anti-dumping measures to protect domestic producers and the balance of payments, which requires emphasising the dangers and not the presumed benefits of liberalisation. The fact that the Commerce Minister has chosen not to emphasise these options is indeed disconcerting.



© MACROSCAN 2000