CHAPTER - 1 RESEARCH PROBLEM AND METHODOLOGY. brought into being continue to demand attention by all countries.

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1 CHAPTER - 1 RESEARCH PROBLEM AND METHODOLOGY 1.1 Introduction: The study of international trade is among the oldest branch in economics. But it flourishes today because of the facts and issues that brought into being continue to demand attention by all countries. Each economy is able to use its resources most efficiently and to reap significant economies of scale. Conversely, a country's international transactions impinge on the conduct of domestic policies. The exchange rate regime, direction of trade, trade volume, etc., are all important. All these activities have undergone several changes due to liberalization. Liberalization process in India began in the mid-seventies, but the process of reorientation of Liberalization gathered momentum since mid-eighties. It is worth mentioning that the Import-Export policy announced in April 1985 was a major step in this regard. The New Economic Policy of 1991 reinforced liberalization process with a view to integrate the Indian economy with the world

2 economy. The foreign trade policy introduced in 1991 had a thrust towards creating a more comprehensive environment in the economy as a means to improve the productivity and efficiency of the system. Many policy innovations have been introduced rapidly in foreign trade reform. In this regard, the announcement of comprehensive trade policy in place of import - export policy during September 2004 by the UPA Government is landmark in the history of international trade of India. The import and export policies have been reassessed to permit imports of essential items in the required volume with charges in items under Open General Licensing System and the Restricted List. Besides this, there has been a lowering of import duties in respect of final product and components are being rectified or eliminated as far as possible. Since 1991, there has been a decisive change in the thrust of trade policies. The trade and payments regime is undergoing a sea change, which will improve the country's competitiveness and export orientation. 1.2 Statement of the Problem: Since July 1991, the trade policy replaced a large part of import licensing by import entitlements, linked to export earnings.

3 The Import Replenishments Scheme was enlarged and restructured as Exim Scrips, which allocate import according to the changing market conditions. The introduction of convertibility was a distinct improvement on the Exim Scrips. With the unification of exchange rates there is an added incentive as more rupees can be earned on exports. India, being chief spokesman of the developing world has contributed much in reshaping the international monetary management machinery suiting the developing countries. In this context, the present research work aims at analyzing the impact of changes made in the trade regime and assess the impact of Liberalization on the exports of agriculture and industrial goods. 1.3 Review of Literature: This section analyses the contributions of liberalization programmes in promoting international trade of India. Hence, the literature reviewed here deals with the factors responsible for adopting drastic steps of liberalization and their impact on agricultural and industrial exports in particular. 3

4 Developed and developing countries alike have difficulties in managing their trade, payments and exchange rate regimes and there is considerable body of literature that attempts to analyze the problems relating to them. Compared to the developed countries, the problems of developing countries, the trade and payments regimes appear to be considerably complexity. These regimes some times feature multiple exchange rate systems as most often the developing countries depend on quantitative restrictions on international transactions. The exchange rates under complex situation play a different role, one it would if individuals were free to carryout their transactions at prevailing prices. In most developed countries, trade and payments regimes have generally been less complex and reliance upon quantitative restrictions for purposes of managing the balance of payments was gradually reduced over the years. It is generally, believed that as developing countries tend to rely more on quantitative restrictions, departures from unified incentives have caused considerably greater variance in distortions. The issue of quantitative restrictions has become important to the developing countries, like India, in view of the fact that foreign exchange earnings have been regarded as a central Concern for 4

5 purposes of economic growth, so that policy decisions affecting the foreign trade and payments sector have assumed greater importance in efforts to achieve domestic economic goals and structural reforms. Instability around the trend, structural changes in the commodity composition of trade, geographical pattern of trade and role of policies and infrastructure are considered for analysis in the present research study. The study concludes that both import substitution and export- orientation in the agricultural sector have proceeded on an extremely slow pace. The various structural weaknesses of the agricultural sector like low productivity, low scale of production, inappropriate relative prices, traditional technology and poor infrastructural facilities are responsible for this. Datta, et.al. (1999) look into the trend aspects of agricultural trade in India. Pursell and Gulati (1994) examine the liberalization in agricultural commodities up to the period The competitiveness of agricultural commodities are examined by Gulati et.al. (1994). The behaviour of domestic prices of agricultural commodities as against the world prices is examined by Nayyar and Sen (1994). 5

6 A study by R.S. Deshpande and Deepika M.G. (2004) has examined the stages of liberalization in agricultural trade starting from the early nineties to the latest Exim policy. The extent of liberalization in agricultural commodities is examined through the review of Exim policies of lndia of various years. The shift of commodities from the different restricted lists to free lists is observed. By looking into the trends and policy changes in the exports and imports of some major commodities and the policy changes in them, they tried to link the trade scenario of agricultural commodities with the trade policy changes. Along with the changes in trade policy they have also observed other macro variables relating to agricultural trade over the last three decades. Their study examined the change in the trade scenario of lndia from 1960 to 1999, in terms of its contribution to the balance of trade of India, growth and stability in trade, and change in the composition of trade and the relative price movements of agricultural commodities through a trend analysis. Three issues are generally cited, when differentiating between developed and developing countries with respect to quantitative restrictions. They are: (a) The autonomy of exchange control regimes, and how do the complex quantitative and price interventions 6

7 interact with each other and with domestic policies to affect relevant variables; (b) The critical conditions associated with the anatomy of the exchange control regime affect the economic impact of devaluation and how does devaluation analyses under exchange control differ from that under convertibility; (c) The choice of alternative trade and payments policies affect the prospects for economic growth. India was on the threshold of liberalizing non-tariff barriers under the provision of World Trade Organization by the year In the pre-1990s period, India's import and export policy was highly protected with different categories of importers, different types of import licenses, and alternate ways of importing. A number of concrete steps towards liberalization have been taken during the Nineties within the framework of economic reforms. At present, the new trade policy publishes negative list of items, which cannot be imported through Open General Licenses. The negative list of imports consists of three main categories: (a) Prohibited (b) Restricted items and (c) Canalized. The prohibited items are fallow fat, or animal fat, wild animal and ivory. A large number of consumer goods (including consumer durables) are restricted and the import is allowed only against the licenses. 7

8 Since October 1995, the Government of India has been publishing Export-Import policy of India, ITC (Harmonised Systems) classification of Export and Import items at regular intervals. This document defines the import policy for all the products (or national lines). There are very few studies analysing systematically the impact of removal of quantitative restrictions on Indian economy in general and also on certain specific sectors like agriculture, industry, services, etc. Of course, a good number of papers appeared in national dailies like Economic Times, Business Standard, Financial Express, etc., by distinguished economists like P.R.Brahmananda, Manoj Pant, etc. However, two studies conducted by the Research and Information System (RIS) for Non-aligned and other developing countries is worth mentioning and reviewing. They are: (I) WTO and Industrial Tariffs - An Empirical Analysis for India, by Rajesh Mehta and S.K.Mohanty (1999). (2) QR Removal and India's Import - The Case of India's Unilateral Offer for SAARC Countries by Rajesh Mehta (2000). The first study analyzing India's tariff policy with major trading partners including Australia, Canada, European Union, Japan and USA 8

9 and conclude that lndia along with other similar developing countries should negotiate for more liberal trade environment for industrial sector in the rest of the world. lndia should demand, according to the authors, for a comprehensive review of tariff commitments made in the Uruguay Round and inclusion of market access for industrial tariffs in the basket for negotiations if required. According to the study, lndia also requires replacing of specific rates of import duty by an advalerem rates. There is also urgent need for negotiation for ceiling on tariff binding. Negotiations for tariff, electrical and mechanical machinery, plastic and rubber, stone and glassware, base metal, wood and wood products. The list of broad product segments for negotiations will vary from country to country. India's priority list in the US market should be textile, transport equipment, chemicals, leather and leather products. In the European Union (EU) market, the most important product segments are textile, transport equipment, plant and machinery and footwear. lndia can start renegotiations with Japan for two important sectors: leather and leather products and footwear. In addition, lndia can benefit by negotiating with Australia in sectors Like textile, leather and leather products and transport equipment. Y

10 Following renegotiations, India's export is likely to get boost in the markets of the US and the EU. The increase in the market access in Japan and Australia is likely to be marginal. The emphasis for renegotiation should be given to the US and the EU. The second study estimates the likely increase in India's import demand due to removal of non-tariff barriers which are subject to the import policy of restricted or canalised route or Special Import List (SIL). The study, however says that its results of likely increase in India's import demand will be close to a scenario of removal of quantitative restrictions for balance of payments reasons. Basing on this optimism, the study carried projections of likely increase in India's import demand separately for three types of non-tariff barriers, viz., restricted items, canalised and SIL (Special Import List). The expected increase in India's import demand for items, which are subject to general import policy restricted items will be 6.8 percent of India's total imports. The corresponding estimates for canahsed and SIL items are 0.3 percent and 0.17 percent respectively. The sum totals of these projected values given an estimate of India's total increase in import demand due to recent changes in policies. In total, the likely increase in India's import demand will be 10

11 7.3 percent of its imports. It implies that lndia has opened up its domestic market to the extent of 7.3 percent of its current import. Although lndia has opened market to the level of 7.3 percent of her import, it is possible that other small and medium companies (SMCs) may not have export potential for all the commodities in which lndia has given unilateral concessions. In an alternate scenario, the study has estimated the likely increase of India's import for only those commodities (subject to unilateral concessions) in which other SMCs have registered export potential. This scenario includes those items, which are subject to hard-core Non- Tariff Barriers (unlike SIL). There are other studies which are published in Economic and Political Weekly, on various issues such as under valued imports, WTO's Agreement on Agriculture, phasing out import licensing, quantitative restrictions etc. A brief review of some of these studies is attempted in the following paragraphs. Satapathy, C. (2001) opines in his paper on "Valuation of Undervalued and Dumped Imports Domestic Rulings vis-a-vis GATTI WTO Jurisprudence-I" examined the ticklish issue of domestic I I

12 rulings vis-a-vis GATTIWTO jurisprudence in the context of a recent ruling by the Supreme Court touching on what constitutes 'ordinary course of trade'. Satapathy, C. (2001) in his paper entitled "Under-valued Imports and Public Interest - Domestic Rulings vis-a-vis GAlT/WTO Jurisprudence-ll" has discussed that the implications of applying domestic competition laws to cases of alleged under-valued or dumped imports in the context of some recent decisions by the MRTP Commission. The article examines the constituents of public interest and to what extent it should guide action against low valued imports. Damodaran, A. (2001) in his paper on "WTO Agriculture Agreement, Common Property Resources and Income Diversification Strategy" highlights that a two-pronged strategy to address the central concerns arising out of WTO's Agreement on Agriculture (AoA) in relation to developing country's agriculture in general and India's agriculture in particular. The study advocates rigorous negotiation position and proactive programmes of development in order to address the pressing problems arising from the Agreement on Agriculture. 12

13 According to the author, developing countries, whose agrarian economies are characterised by 'ecosystemic multifunctionality' have the scope for providing income diversification opportunities for the weaker sections of the farming communities through development of common property resources. This could form the best safety net to contain the fallout of the agri-agreement. Sanjoy Bagchi (2001) in his work "India and the WTO Sectarian Interests versus the Public Good" feels that an alliance of diverse sectarian interests is claiming that India's acceptance of the results of the Uruguay Round of trade negotiations is threatening the sovereignty of the nation and the supremacy of its parliament. It also suggests that the fallacy of this wild propaganda needs to be exposed and the people educated on the benefits of a liberal and competitive trade regime. Sanjoy Bagchi (2001) in another paper on "End of Quantitative Import Restrictions Unfounded Fears" concludes that the paranoia in some quarters over the ending of quantitative import restrictions will be proved unfounded and will die down. There will be some difficulties initially, particularly because domestic producers have been protected for so long. In the longer run 13

14 competition from producers elsewhere will be beneficial for the domestic economy. This will, however, require policy-makers and other economic agents to give up their defensive attitudes and approach positively the tasks of becoming globally competitive. Kalyan Raipuria (2001) in his paper on "Service Exports 'Knowledge Bowl' Yet to Yield Major Gains" argues that in the new millennium, with information and communication technology led global progress, trends point to a major expansion in the world trade in services, particularly 'other services'. India is in a good position in the league of service exporters among the developing countries. But this advantage is yet to be fully reflected in our exports of' other services. Satapathy, C. (2001) in his another paper on "WTO Work Programme on E- Commerce - Strategy for Further Negotiations" feels that a possible negotiating strategy on e-commerce at the Doha Ministerial conference for developing countries such as India, which despite typical infrastructural weaknesses, have demonstrated a strong growth potential in e-exports. Sathish, Y. Deodhar (2001) in his article on "WTO Pacts and Food Quality Issues" comments that trade liberalisation, hoped to be 14

15 achieved through the WTO Agreement on Agriculture, is expected to lead to export promotion and import substitution for the Indian food sector. However, the paper desires that, these opportunities cannot be exploited unless attention is paid to two important WTO agreements. To maximize the benefit from these agreements, India will have to improve its safety and quality norms and import monitoring mechanisms. Sridhar Krishna (2001) in his study o,n "Phasing out of Import Licensing Impact on Small-scale Industries" states it has been suggested that there will only be a marginal increase in import demand as a consequence of removal of quantitative restrictions on imports. But the problem needs to be viewed on a selective basis, since certain industries are likely to be hurt because of their peculiar circumstances. Action to redress the situation has also to be taken on a selective basis.

16 1.4 Objectives of the Study: The general objective of the study is to assess the impact of liberalization process/programme of lndia on the exports of agriculture and industrial goods. However, changing policies of the government from time to time is also reviewed. But the specific objectives of the study are as follow. 1. To understand theoretically the link between foreign trade and economic growth. 2. To examine the new incentives and changes in the Liberalization of trade polices in lndia since 1991 to To assess the impact of liberalization process on the exports and imports of agricultural commodities. 4. TO examine the implication of removal of quantitative restrictions under WTO regime on Indian Foreign Trade in order to fulfill one of the conditions of liberalization. 5. To assess the impact of removal of quantitative restrictions on the exports of agricultural and industrial commodities. 16

17 6. Finally to identify the problems and constraints emerged due to liberalization foreign trade policies and suggest policy measures. 1.5 Hypothesis: The present study has formulated the following hypothesis. 1. There is a significant and positive relationship between trade Liberalization process and India's foreign trade. 2. There is a significant impact on trade due to removal of quantitative restrictions on export and imports of agricultural and industrial goods in India. 1.6 Methodology: Methods ti Tools: This study is based on long period time series data. Since the experience with Quantitative Restrictions removal is new, we followed the methodology of making an impact evaluation of WTO using only post situations relating agriculture, industry and External Trade of India. On the evaluation of the impact of liberalization on the economy of India, particularly exports and imports from agriculture and industry after the WTO scenario, Trend 17

18 analysis is followed, 10 yearly moving average of a simple growth rates of agricultural exports and imports are adopted. To examine the Extent of stability along with the growth rates in different time periods the coefficient of variation has been calculated for different time periods. Study also made some efforts in comparing the trends in these sectors using the method of computing percentages. Technically we have not listed the hypotheses but verified through the inferences drawn from various tables as per as first hypothesis is concerned we find that, increased trade liberalization did boosted the foreign trade. 1.7 Period of Study: The study is essentially based on secondary and published data and the information available from both governmental agencies and professional journals. The data are collected from sources Like Economic survey and the data published in Economic Times, Economic and Political Weekly (EPW), etc. These data are collected mainly from the post reform period i.e. post 1996 and for the comparison purposes the pre 1995 data are also studied for policy review is between 1991 and We have selected this period obviously IX

19 because it has been the most crucial period of growth in Indian economy. Since 1991, India has effectively participating in widely desired Liberalization process and deregulating policies. Hence, the period is very important and the developments during the period deserved thorough investigation. 1.8 Scope of the Study: Since the topic of the research is on trade liberalization and its impact on India's foreign trade, it is too general study for an investigation. Hence, deliberately the scope of this study is limited to assess the impact of liberalization on the exports of Indian agriculture, industry in general and impact of removal of Quantitative Restrictions (QRs) in particular. Further an attempt is made in the study to evaluate the latest policy known as Comprehensive Trade Policy (CTP) announced by UPA Government announced in September Limitations of the Study; 1. The title of the study is too broad to investigate thoroughly on all aspects of Liberalization as well as in all sectors of the 19

20 economy. Hence, the scope of the present study has to be pruned to asses liberalization impact on only exports and imports of agriculture and industry. 2. Even the definition of liberalization is too broad and covers several schemes and policy changes within it. Therefore, an attempt is made only to know the impact of one of the schemes i.e., removal of Quantitative Restrictions on the trade of agricultural and industrial commodities during the post reform period. However, its impact on imports and exports of Agricultural commodities is also assessed. 3. Since the study is solely based on the secondary data, the reliability of such data depends on the sources. Of course, we have mostly taken the more authentic sources such as FAO, EPW etc.,

21 1.10 Chapter Scheme: The study is arranged in six chapters. Chapter 1 consists introduction, importance of the study, statement of the problem, review of literature, research gap, objectives, hypotheses and methodology. Chapter 2 devotes for understanding theoretically the link between foreign trade and economic growth as well as changes in the trade policies and also contains the analysis the impact of Liberalization on the exports of agriculture over a period. Chapter 3 deals with framework of W O and the various provisions of WTO including the importance of removal of quantitative restrictions. Chapter 4 deals with removal of Quantitative Restrictions and its impact on Industry and Trade. Chapter 5 analyses the reasons for removal of Quantitative restrictions, and its impact on agriculture. Chapter 6 includes summary, conclusions and policy initiatives to neutralize the impact of Quantitative Restrictions removals.