The swadeshi route to liberalisation

Published : Apr 25, 1998 00:00 IST

The BJP-led Government's decision, as reflected in the Exim policy, to accelarate import liberalisation, despite signs of a widening current account deficit, shows that it is more keen on pleasing the developed countries represented in the WTO than pushing ahead with its swadeshi plank.

IT has taken the BJP Government less than a month in office to drop its swadeshi slogan. The exim policy, the first major economic policy initiative of the new Government, has accelerated the pace of import liberalisation by moving 340 items from the restricted list to the Open General Licence (OGL) category. In addition, the Government has announced its decision to shift a further 300 items from the Special Import Licence (SIL) to the OGL list by the end of April. Trade liberalisation, it is clear, is still on top of the agenda.

This decision to continue with and intensify the trade reform programme initiated in 1991 appears to be driven by two motives. First, the need to appease developed country governments represented in the World Trade Organisation, just prior to the WTO's second Trade Policy Review of India scheduled for April 16. According to official sources, in as many as 298 of the 340 cases of items shifted to OGL, the shift has been necessitated by agreements entered into with India's leading trade partners such as the United States, the European Union, Australia, Switzerland and Japan. Most of these items are consumer goods, both manufactures and raw or processed agricultural and fishery products. The aim is to extend import liberalisation, which was hitherto restricted to capital and intermediate goods, to the consumer goods sector.

What has been left unstated, however, is the time-frame within and the pace at which India had agreed to undertake whatever liberalisation it had promised and the reciprocal gestures to be made by these and other trading partners. For example, in an area such as textiles even though the first commitments to do away with quotas were made by the developed industrial countries as far back as 1961, the Uruguay Round agreement provides for an unjustifiably slow process of removal of non-tariff barriers. The process is to occur in four stages over a ten-year period and is heavily "backloaded", in the sense that most of the liberalisation occurs during the last stages.

In the first stage, beginning on the date on which the Uruguay Round agreement became effective, each signatory nation was required to remove quotas only on products that accounted for 16 per cent of its total volume of imports of four categories of textiles and clothing in 1990 (tops and yarns, fabrics, made-up textile products and clothing). In the second stage, beginning three years and one month after the agreement entered into force, quotas are to be removed on a further 17 per cent of the total volume of 1990 imports. In the third stage, which begins four years later, quotas are to be removed on products that account for not less than 18 per cent of the total volume of 1990 imports. Finally, after 10 years and one month, all other quota restrictions are to be eliminated.

These features of the Uruguay Round agreement on textiles and clothing suggest that, even if the current import liberalisation decisions are warranted by the commitments made by earlier governments, there is no reason why a new government with strong preferences could not have demanded a renegotiation of the pace and pattern of liberalisation. This would be all the more justifiable given the signs in the recent months of India's current account deficit widening. If yet liberalisation tops the agenda, it can only be because pleasing the industrial countries rather than pushing ahead with its swadeshi plank is a priority for the BJP.

THE second motive driving the accelerated reform of trade appears to be the need to revive India's sluggish export growth. The rate of growth of exports in dollar terms, which stood at 20 per cent prior to 1996-97, decelerated to 4 per cent that year and is expected to fall further to less than 3 per cent in 1997-98. The Union Commerce Minister Ramakrishna Hegde has promised not only to reverse this decline and set an ambitious 20 per cent export growth target, but also to stimulate the recovery by furthering reform. In his words, he has "tried to focus mainly on improvement of export competitiveness, having trust in the export community." Thus export growth is not to be achieved by disciplining domestic industry into earning the foreign exchange needed to justify its foreign exchange profligacy or by adjusting the value of the rupee, which has depreciated far less vis-a-vis the dollar than the currencies of some of India's international competitors in East Asia. Rather, the aim is to coax producers into becoming internationally competitive and exporting a higher share of their production, by making it easier for them to do so. To that end, Ramakrishna Hegde has provided freer access to imported capital goods, intermediates and components to exporters big and small; virtually done away with the duties applicable on such imports or compensated exporters in full for the duties they pay; eased the conditions with regard to future exports that they have to meet to be eligible for such concessions; and decentralised the authority to provide individual applicants such concessions.

In addition, recognising that big business has been the most reluctant to export (even while being the most eager to import), he plans to enter into a 'dialogue' with the top 500 corporations in India which export less than 10 per cent of their output, making persuasion rather than disciplinary instruments the principal means to trigger an export recovery. Underlying that inclination is the acceptance of the view, espoused by the WTO in its Trade Policy Review of India and backed by the World Bank and the International Monetary Fund, that the fundamental reason for the deceleration of India's exports in the course of reform is the unconvincing explanation that the reform has not progressed enough.

Two consequences of the BJP accepting this principle and making the facilitation of exports the fundamental thrust of export policy are reduced protection and a loss of revenue. With more concessions and easier terms under the Duty Entitlement Passbook (DEPB) Scheme and Export Promotion Capital Goods (EPCG) Scheme, preliminary estimates place the revenue loss at Rs. 3,500 crores. Only if the Government decides to hike import tariffs in order to compensate for the reduced protection resulting from the removal of quantitative restrictions on imports of a wide range of goods, can this loss be neutralised.

It would be wrong to say that India cannot opt for such an increase in tariffs. First, even though the number of tariff lines in which India has bound itself with a ceiling on tariffs rose from 6 per cent prior to the Uruguay Round to 67 per cent after the Round, as much as 38 per cent of manufactured tariff lines are still not bound. Consumer products, which are now the principal area of import liberalisation, account for a major share of the lines in which tariff bindings do not apply. Raising tariffs here is still a possibility. Second, average tariffs today are much lower than the average bound tariff. In agriculture, the average bound rate is 94 per cent compared with a 26 per cent simple average applied rate; in mining, the rates are 36 and 25 per cent respectively; and in manufacturing the bound average of 52 per cent compares to the applied average of 36 per cent. An increase in tariffs is possible in all these areas.

Resorting to increased tariffs, however, involves reversing the unilateral decision taken by previous governments to ensure a continuous decline in maximum and average applied tariff rates. The maximum tariff rate has been reduced from 35 per cent in 1990-91 to 85 per cent in 1993-94 and 45 per cent in 1997-98 and the average weighted tariff rated from 87 per cent in 1990-91 to 47 per cent in 1993-94 and 20 per cent in 1997-98. The aim of this exercise was to bring India's tariff rates down to levels that prevail in the countries of the Association of South East Asian Nations (ASEAN) by the turn of the century. If the BJP's keenness to succumb to developed country pressures within a month of its assuming office is any indication, there is no likelihood of its reversing the self-imposed sacrifice of the protection and the revenue that tariffs offer, which has been characteristic of the reform years. If tariffs are not raised despite an intensified effort to remove quantitative restrictions, a sharp rise in imports is an inevitability.

Since the thrust of policy is increasingly to dissociate foreign exchange earning from foreign exchange expenditure, this could mean an increase in the trade deficit. In fact, with the threat of a speculative attack on the rupee making currency depreciation a policy to fear, any revival in exports, which have decelerated despite liberalisation, is unlikely. This is all the more true since the East Asian crisis is expected to slow down the growth of world output and trade substantially in the coming year. All this makes the widening of India's trade and current account deficits a real possibility, making it even more dependent on private capital flows to sustain its balance of payments. The BJP has chosen a path which would increase India's vulnerability and its dependence on foreign finance.

ONE consequence of this strategy is that despite its 'swadeshi' rhetoric, the BJP would be forced to go along with the economic agenda set by the developed countries for India. This, however, may be a self-consciously pursued outcome. Striking compromises not just with its domestic allies but with the new international friends it is hoping to make may be a prerequisite for legitimising whatever social and political agenda, hidden or otherwise, that the BJP wants to push through. The sacrifices entailed by that project are its swadeshi plank and its commitment to garner more revenues to strengthen the domestic infrastructure. The BJP, it appears, is conscious of that.

Not only has it opted for greater liberalisation to please the WTO and its powerful members, but Union Finance Minister Yashwant Sinha has been making the appropriate conciliatory gestures at the spring meetings of the IMF and the World Bank in Washington and going out of his way to invite foreign investors into the domestic economy, especially in the infrastructural area. Closer home, Bill Clinton's envoy Bill Richardson has praised the new Government on almost every count, including its measured response to Pakistan's effort to flex its missile muscles.

In return for good behaviour, it is likely that some of the BJP's nationalist rhetoric, including its stated intention to keep the nuclear option "open", would be condoned. The BJP has mastered the art of playing with symbols - whether they be nebulous ones like swadeshi or real ones like the bomb or the mosques it wants to destroy and the temples it wants to build. The symbols which matter are those which reflect slogans that would be translated into practice. What is quickly becoming clear is that any symbol reflecting an economic nationalist or anti-imperialist posture would find its way into a cupboard meant for use, if at all, in the next elections. What remains to be seen is the nature of the real agenda for which political space is bargained for in this manner.

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