CONSEQUENCES OF REFORMS OF FOREIGN TRADE POLICY IN THE

NATIONAL WELLBEING FRONT IN INDIA- A PRAGMATIC RESEARCH

SYNOPSIS

1.0. Introduction

In the recent times, in the literature relating to international trade, the evaluation of the

foreign trade policies (hereafter referred to as trade policy), with its liberalisation of trade

initiatives, has attracted a significant focus among the researchers. A broad definition of the

term trade policy encompasses all the policies that holds a perceptible influence in a direct

manner or otherwise, on the export initiatives as well as on the import feature of goods as

well as services in a nation.

The trade policy is dichotomised into a free trade policy and non-free trade policy. Under the

free trade policy, the tariff and non-tariff barriers may be conspicuous by their absence that

enables the free and accurate transportation of goods and services, in addition to the

movement of the factors of production as well as processes. In contrast, under the non-trade

policy, there exists a kind of restrictive policy, in which the national trades are safeguarded

from the international competition by means of giving subsidies in order to equip them to

compete with international products and through limiting the imports by way of thrusting

upon tariffs in the form of advalorem and specific or restricting the imports by quotas.

The trade policy, depending on its nature has been classified into inbound as well as

outbound focused trade policy. A trade policy that is inbound focused, gives importance to

and encourages the import substitution and there by gives protection to national trades.

Whereas, a trade policy that is outbound focused offers incentives, irrespective of the fact

whether the production is meant for domestic consumption or for export. Hence, a trade

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policy which is outbound focused does not show discrimination against exports or imports

and takes a laissez-faire attitude towards import substitution. The international trade assumes

greater importance in the context of promoting the exports as well as well as import

substitution and hence such a trade policy is generally described as the export promotion

policy. The outbound focused trade policy initiatives offers an abundant relaxation by means

of de-controlling foreign exchange transaction, mitigation of export restrictions as well as

state trading, and liberalisation of import quotas, import licensing and such other quantitative

controls. The above mentioned steps are accessed with the prime objective of mitigating the

prejudice against exports as against domestic trades and in the resources allocation, in

addition to enhancement of competition, encouraging a configuration of the domestic process

of the tradable goods with the international prices and finally, enhancing the participation in

the division of labour internationally by means of increase in exports as well as

diversification. According to UNCTAD (1993), which gives emphasis on exports holds that

“the expansion of exports was expected to give a new impulse to economic activities, raise

foreign exchange proceeds to service debt and mitigate the often service constraints on

import capacities, to expand investment at a more rapid rate and thus accelerate their

economic development” (p.324).

The relaxation on trade is characterised by the decrease or elimination of control measures

which impact the trade functions either in a direct or indirect manner, like the monetary and

fiscal strategies, industrial policies, strategies relating to import tariff and export subsidy and

other quantitative restrictions. Recently, the trade relaxation initiatives centre around a more

elaborative array of policy adjustments steps which have very often been accessed as a sequel

to the restricted finance accessible from avenues such as the multi-lateral organisations, the

World Bank and the IMF. Their prime focus of trade liberalisation lies in the elimination of

import quotas and such other quantitative controls or their conversions into traffics; and

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consequent decrease in the degree and the spread of import tariff rates and / or decrease in

import taxes. In short, the liberalisation o trade forms a significant measure in the direction of

the outbound focused trade policy.

During the later part of 1970s and the early 1980s, the developing nations experienced an

array of setbacks in the form of spiralling oil prices, increased rate of interest, and the

unfavourable conditions in the trade front as a consequence of the downfall of the prices in

the basic commodities globally. Several nations responded to the adverse balance of payment

through a measure of widening the restrictions on imports. On the other hand, many countries

took efforts to access trade policy reforms of their own or on the guidance of the World Bank,

in order to facilitate their economies enjoy a smooth sale in the trade sector and achieve a

more competitive trade market.

1.2. Rationale for the study

In the Indian trade scenario, the relaxation of foreign trade policy began in the early period of

1980s and sustained through the later part of 1980s. In the last few years, such reforms

relating to trade policy were initiated together with the on-going reforms in the economic

front from July 1991, through bestowing greater attention. There reforms can be grouped into

two segments. The first segment, which is the stabilisation segment , focuses, in the short-

run-on mitigating the range of aggregate demand by means of decreasing the current account

deficit( e.g. as a percentage of GDP) and is known as the outside stabilisation programme,

and through decreasing the rate of inflation at the domestic level which is known as the inside

stabilisation programme. The second segment of the reforms, which is the adjustment

segment, which concentrates on, medium and long –term, enhancing the rate of growth in

output through such measures like diverting the resources from such trade functions which

concentrate on import production to functions which are export oriented, ensuring a greater

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level of openness of the economy ,diverting the government sector resources to private sector

initiatives and accessing structural shift in the incentives and organisations so as to ensure an

enhanced dependence on market and thereby weaning out gradually , the role of the state.

It is a fact that should be stressed is that, the reasons behind such reforms were because of the

crisis in the external sector. In support of this, it was experienced that the current account

deficit, which stood at the average of 1.3 percent of GDP during the period 1980- 85,

increased to 2.2 percent during the period 1985-90 , and further registered a rise to 3.2

percent during the year 1990-91. The position of foreign exchange reserves also did not show

an encouraging trend which indicated an all time low of US$ 2236 million in the year 1991,

just sufficient to meet the three weeks import transactions. Under the scenario of such critical

economic condition, the government was compelled to access the trade policy reforms with

the intention of, among others, enhancing the balance of payments situation. Hence, the trade

policy reforms take a prime position among other reforms.

The trade policy reforms consists of the export policy which focuses on export promotion as

well as liberalisation measures and the import policy that focuses on import restriction and

liberalisation measures. Several measures aimed at regulation of imports, export promotion

and liberalisation of exports have been accessed, from time to time, by means of the export-

import (EXIM) policy. The significant goal of the EXIM policy measures lies in the

consolidation of the Indian economy to the range of the global economy, making steady the

domestic demand and supply through the process of trade and enable the optimum

exploitation of the nation’s dynamic competitive edge ( i.e. shifts in a nation’s relative output

efficiency which is followed by trade performance in the long urn instead of a particular point

of time), remove the licensing and discretionary restrictions; safeguard the Indian industry

through provision of adequate protection, encourage productivity, modernisation and

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competitiveness of Indian industry and also simplify and aligning the procedures relating to

imports as well as exports.

Over a period of time, the execution of such various trade policy reform initiatives have

driven to many policy challenges and questions such as:

1. Has the trade reform measures succeeded in assessing the impact in the areas of

volume, growth, composition and direction/ sources of exports and imports?

2. What changes the trade reforms could elicit in the nature and volume of exports and

imports during the period of the trade reform?

3. What are the fundamental trade policy appliances and their vital aspects in impacting

the trade policy elements, viz, the exports and imports?

4. What is the mechanism to define and measure quantitatively the influences of shifts in

exports and imports from the point of view of domestic welfare?

5. Is it possible to define domestic welfare with reference to national income or from the

point of view of production in the situation of measuring the impact of trade reform

initiatives?

6. Which among the trade policy appliances acts as the most efficient in optimising the

domestic welfare in India?

7. Which are the various stages of trade regimes which India has undergone and at

present it is in which stage?

8. Is the outward orientation necessarily has the effect of accessing positive welfare?

9. What are the lessons which India can draw through the experiences of other nations

which have accessed success in trade policy reforms?

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 10. What are the linkages between India’s domestic trade policy reforms and shifts in

international trade policy experience, viz under WTO, the World Bank and

globalisation scenario?

To trace the plausible solutions to the above raised questions is an interesting thing

academically and also applicable to policy. In the final evaluation, the policy relevance of the

solutions depends on offering the trade policy reforms that is based strongly and justifiable.

This research tries to elicit this policy implication which forms the primary motive of the

research.

1.3. Aims of the research

This research focuses on the practical analysis of the trade policy reforms’ impact in domestic

welfare in India. The nature, scope and objectives of this research broadly are given below

1.4. Nature and scope of the research

It is to be remembered that, India is an open economy having a federal structure of

government and mixed system of economy. By openness means the presence of global trade

as well as global mobility of factors of production. The federal structure of government

implies that the economic policies may be designed and implemented at various levels of

government, such as, Federal/central/Union Government and State/Regional Government.

The mixed economic system gives more stress on the coexistence of public sector, private

sector and joint (public-cum-private) sector. Hence, the nature, working and influence of

economic functions and policies relating to production, consumption, distribution, exchange

and allocation in the Indian economy are explainable and predictable from the features of the

Indian economy such as openness, federal and mixed. The trade policy reforms are not and

cannot be an exception to this explanation and prediction. In addition, there exist inter-

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relationships between reforms within as well as between sectors. Hence, any effort made to

isolate the impact of the reforms of any one sector from other sectors would only give a

partial explanation and prediction of the impact of sectors reforms.

Actually, this research accesses such a partial approach because it pays attention to only on

the impact of trade policy reforms in particular and select external sector reforms in general.

Since the research also assess the impact of trade policy reforms on domestic welfare in

India, it is necessary to describe the definition and measurement of domestic welfare under

the study situation. Another aspect is on export and import variables relating to a particular

traded commodity that emphasized the trade policy reform prevalent in India. Hence, this

research makes an assumption that the total impact of commodity specific trade policy

reforms may be represented by observed shifts in the entire exports and imports in the

national economy. Accordingly, the impact of shifts in total exports and imports on domestic

welfare is regarded as a feasible method in order to capture the impact of trade policy reforms

on domestic welfare. Thus, this research focuses on capturing and analysing the impact of

trade policy reforms on domestic welfare through shifts in observed total exports and imports

in the economy.

1.5. Important aims of the research

The ensuing are the important aims of the research

1. To assess the nature and system of trade policy reform measures in India, especially

since July 1991.

2.To assess the fundamental elements of trade policy reforms in select East and Southeast

Asian countries, and shifts in global trade policy situation with special reference to Fund-

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 Bank conditionality, India’s obligation to WTO and globalization phenomena, and elicit

implication for trade policy reforms in India.

3. To review the alternative methods to measuring the influence of trade policy reforms

with special reference to the impact on domestic welfare.

4. To recommend a simple theory for assessing the impact of trade reforms on domestic

welfare through the functions of exports and / or imports at the national level of

consolidation.

5. To assess the efficiency of trade policy variables from the point of view of optimising

the domestic welfare.

6. To elicit implication for the design and execution of welfare-oriented trade

liberalization for India.

2.0. Research Methdology

The approach of the research is both descriptive and prescriptive. The descriptive approach

is made use of to assess the alternative indices of trade liberalization for measuring trade

policy reforms in India; recommend a simple theory for assessing the total impact of trade

liberalisation on domestic welfare through the functions of exports and/or imports; to devise

an empirical theory for the purpose of estimating the welfare implication of trade

liberalization for India with emphasis on econometric specification of the theory and

technique of estimation; and for eliciting implications for welfare oriented trade policy

reforms for India. The prescriptive approach is made use of to consolidate the economic

theory and policy of trade reforms in India through empirical impact assessment. Hence, the

approach is supplementary to theoretical, empirical and policy elements of the influence of

trade policy reform on domestic welfare in India.

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The research depended, throughout, on the available and published secondary data. The data

relating to domestic exports and imports, exchange rates, labour supply, capital stock,

national income and world exports and income are gathered from national and international

sources. The international sources of data for the research consist of the World Bank

publications (e.g. world Economic Surveys and World Development Reports) and

International Monetary Fund publications (e.g. International financial statistics Direction of

Trade Statistics quarterly etc). The national sources of data for the research include the

Government of India publications (e.g. Foreign Trade statistics of India, Pre-budget

Economic Surveys and National Accounts Statistics). Reserve Bank of India publications and

CMIE publications under Economic Intelligence Services are also used.

3.0. Results and Conclusion

The major results and conclusion from the elaborate descriptive and empirical assessment in

different chapters of this research are given briefly.

1. The research has analysed the interrelationships between trade policy, trade liberalization

measures, outward oriented trade policy, and free trade policy and trade policy reforms. The

research observes that trade liberalization is a vital step towards outward oriented trade policy

or free trade policy, and trade liberalization forms the core of trade policy reforms. Hence, the

assessment of trade policy reforms have impacts on free trade policy, outward oriented trade

policy and trade liberalization measure.

2. In the last few years, the trade policy reforms in India could be traced back to the initiation

of national economic reforms in July 1991. From that period, the reforms have been designed

and executed at the national and sub-national (state) level. Because the foreign trade and

other external sector reforms are in the purview of the Union government/Central

government, and because the main aims of this research is to analyse the impact of trade

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policy reforms on domestic welfare in India, the concentration of this research has been

restricted on the economic reforms of the central government. Such reforms of the central

government are known as the National Economic Reforms in the country. Yet, the trade

policies and trade policy reforms under the reforms are not separable for policy analysis since

1991.

3. The trade policy reforms form part of the whole process of the reforms rather than a part of

either stabilization programme or SAP.

4. The examination of data relating to subsidies indicates that there has been a drastic

decrease in subsidies for export promotion and market development in order to make the

domestic industry more competitive and efficient.

5. The Indian trade policy reforms when compared to countries like Thailand and Indonesia

reveals that India’s trade policy reforms are more comparable.

6. The gathered data relating to different trade regimes revels the absence of structural break

during the research period between 1975-76 to 1995-96.Hence, in contrast to the general

assumption that the start of the Reforms in 1991 created a distinct departure in India’s trade

policy, the outcome of this research clearly indicates that no such distinct departures are

justifiable on empirical grounds.

7. By making use of the estimated equation, this research observes the sources of domestic

welfare for the research period as a whole and for individual years during the research period.

The outcome of the research indicate that of the three variables the contribution of labour to

domestic welfare is the highest, which is followed by the contribution of total capital and

total exports for the study period as whole.

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8. The results indicate that the contribution of labour is the highest followed by the

contribution of total capital and total exports. Yet, as compared to the performance, the

contribution of total exports to domestic welfare has been higher and increasing during the

reform years. Such a finding clearly shows the positive direction of the impact of trade policy

reform on domestic welfare, since it is linked to total exports in the country.

9. The outcomes of the simulation assessment show that the impact of observed shifts in total

exports has higher impact in accessing the domestic welfare than the observed changes in

exchange rates. Yet, the aggregated impact of changes in total imports and exchange rates on

domestic welfare is clearly greater in case of isolated changes in total imports or exchange

rates.

References

UNCTAD Secretariat (1993), “Trade policy Reforms in Developing Countries, Recent

Trends”, Foreign Trade Review, Vol 27, pp. 244-256

Mehta, Rajesh (1997), “Trade policy reforms, 1991-92 to 1995-96: Their Impact on

external Trade”, Economic and political weekly, vol.32, pp.779-784

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