Chapter 10

Foreign Trade Policy and Balance of Payment

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Chapter 10 Foriegn Trade Policy and Balance of Payment

FOREIGN TRADE POLICY AND BALANCE OF PAYMENTS

Advanced countries like Germany, the United States, Japan, and others have used their trade policy to (a) restrict their imports and provide a sheltered market for their own industries so that they could develop rapidly and (b)promote their exports so that their expanding industries could secure foreign markets. In other words, trade policy has played a significant role in the development of the advanced countries. India, however, did not have a clear trade policy before independence, though some type of import restrictionknown as discriminating protectionwas adopted since 1923 to protect a few domestic industries against foreign competition. It was only after independence that a trade policy, as part of the general economic policy of development, was formulated by India.
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MAIN FEATURES OF INDIAS TRADE POLICY (a) banning or keeping to the minimum the import of non-essential consumer goods, (b) comprehensive control of various items of imports, (c) liberal import of machinery, equipment, and other developmental goods to support heavy industry-based economic growth, and (d) a favourable climate for the policy of import substitution.
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PHASES OF INDIAS TRADE POLICY

Five distinct phases in Indias trade policy can be noted as follows: The first phase pertains to the period from 194748 to 195152;

The second phase covering the period from 195253 to 195657;

The third phase from 195758 to June 1966; The fourth phase started aft er devaluation of the rupee in June 1966;
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And the last phase aft er10 Foriegn Trade Policy Chapter 197576.
and Balance of Payment

MAJOR TRADE REFORMS

1. REP will become the principal instrument for export-related imports. To describe REP as a licence is a misnomer. Hence, it will now be called exim scrip and can be freely traded.
2. All exports will now have a uniform REP rate of 30 per cent of the FOB value. This is a substantial increase from the present REP rates, which vary between 5 per cent and 20 per cent of FOB value. 3. The new REP scheme gives a maximum incentive to exporters whose import intensity is low. For example, agricultural exports, which earlier had very a low REP rate of 5 per cent or 10 per cent, will now gain considerably.

4. All supplementary licences shall stand abolished except in the case of the small-scale sector and for producers of life-saving drugs/equipment. These two categories will be entitled to import both under OGL or through supplementary licences.
5. All additional licences granted to export houses shall stand abolished. However, export houses will enjoy a REP rate of 30 per cent of FOB value, and will be granted an additional REP rate of 5 per cent of FOB value.

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Chapter 10 Foriegn Trade Policy and Balance of Payment

6. All items now listed in the Limited Permissible List. OGL items would, hereafter, be imported through the REP route.
7. The exim policy contains a category known as Unlisted OGL. This category stands abolished and all items falling under this category may be imported only through the REP scheme. 8. Advance licensing has been an alternative to the REP route for obtaining imports for exporters. It is expected that many exporters will find the REP route more attractive now. However, for exporters who wish to go through advance licensing, this route will remain open. The e REP rate for advance licence exports is being increased from 10 per cent of NFE (net foreign exchange earnings) to 20 per cent of NFE. 9. In three years time, our objective will be to remove all import licensing for capital goods and raw materials, except for a small negative list. 10. The goal of the government is to decanals all items, except those that are essential.
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11.In the light of the substantial liberalisation of the trade regime, and also the recent changes in exchange rates (aft er devaluation), cash-compensatory scheme (CCS) was abolished from July 3, 1991.
12. In order to make this system more transparent and free, it is proposed that financial institutions may also be allowed to trade in exim scrips. 13. In threefive years, the Commerce Minister hoped that the rupee will become fully convertible on the trade account.

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Chapter 10 Foriegn Trade Policy and Balance of Payment

ASSESSMENT OF THE NEW TRADE POLICY The New Trade Policy (NTP), 1991 aimed to cut down administrative controls and barriers, which act as obstacles to the free flow of exports and imports. The basic instrument developed by the policy is the exim scrip in place of REP licences. The purpose of this instrument is to permit imports to the extent of 30 per cent on 100 per cent realisation of export proceeds. Obviously, the purpose is to bridge the BOP gap.

The trade policy has streamlined various procedures for the grant of advance licences, as also permit imports, through exim scrips routes.
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CURRENT ACCOUNT DEFICIT (CAD)

CAD mirrors the savinginvestment gap in the national income accounts and, thus, constitutes foreign savings. The challenge before the emerging market economies is to leverage foreign savings, and to promote domestic growth without having the long-term consequences of external payment imbalances. CADs, per se, need not necessarily enhance the productive capacity and, thus, overall the GDP growth. This would depend on the underlying component factors that are leading to the CAD. The distinction between gross capital infl ow and net inflow is useful. As the latter must equal the CAD, there is no way in which the net use of foreign savings can increase without an increase in the CAD.
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CAPITAL ACCOUNT DEFICIT

Capital inflows can be classified by
1. Instrument (debt or equity), 2. Duration (short term or long term), and 3. Nature (stable or volatile) of flows. Such taxonomy helps to calibrate the policy of liberalisation of the capital account.

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