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Tuesday, August 04, 2020

Commitment, quick decisions in making of new trade policy

The dilemma for the Commerce Minister was to start off his assignment by announcing the abolition of an export incentive in a Ministry whose aim was to push exports.

Written by Shaji Vikraman | Updated: April 5, 2017 6:09:04 pm
P V Narasimha Rao P V Narasimha Rao

Early in the tenure of Prime Minister P V Narasimha Rao, officials in the economic ministries were hard at work on possible reforms and policy options. In Delhi’s Udyog Bhawan, the new Commerce Minister P Chidambaram, and Secretary Montek Singh Ahluwalia, were discussing radical steps to tackle the trade and current deficits, rapid depletion of foreign exchange reserves essential to pay for imports and meet other obligations, and the outlook on overseas remittances, external assistance and capital. The war in the Gulf had resulted in a surge in the price of crude — the oil import bill in 1990-91 was $ 6 billion, as compared to $ 3.8 billion in the previous year.

Promoting exports in the medium term and squeezing imports in the short term was an obvious response. The rupee was sharply devalued on July 1 and July 3, 1991, which made the case for export sops or incentives weak. Finance Minister Manmohan Singh was pushing for the withdrawal of Cash Compensatory Support (CCS) for exports. Ahluwalia has written about being called by Singh on July 3, to be told that along with the second round of devaluation, the abolition of CCS too would have to be announced.

The Finance Minister’s argument was that a cumulative devaluation of 24% had rendered this incentive to exporters redundant. While briefing his minister, the Commerce Secretary said the proposal was logical, and abolishing the CCS would signal India’s seriousness in lowering fiscal deficit — which would have an impact on overseas creditors and the market.

Ahluwalia warned Chidambaram that there would be a storm of protests from exporters, but said this could be tackled by simultaneously announcing a new trade policy — already in the making, and which would liberalise import access and give exporters greater incentive via the premium on a reformed Rep licence called the Eximscrip.

The dilemma for the Commerce Minister was to start off his assignment by announcing the abolition of an export incentive in a Ministry whose aim was to push exports. According to Ahluwalia, Chidambaram and he discussed the issue on the same day — July 3 — with Singh, saying that while the announcement of the second round of devaluation could not be delayed, it would look good if it was linked with the announcement of the trade policy.

According to Ahluwalia, the Finance Minister agreed, despite opposition from his Ministry officials. He asked if the Commerce Ministry would be able to work out the proposal quickly enough to get the PM’s approval that evening. Chidambaram and Ahluwalia said they would be back with the file by the evening.

Returning to Udyog Bhawan, the two of them swiftly finalised a 13-point package featuring a new incentive for exporters — Eximscrip, or the Export Import Scrip. The Eximscrip — which replaced the Rep licence — had been written about by Ahluwalia in a reforms strategy paper prepared while he was in the PMO. Eximscrips were issued with a face value of 30% to 40% of the export value, and could be used to import anything up to this value — but unlike Rep licences, duty had to be paid on restricted items of import.

Also part of the package was a commitment that within three years, all import licensing for capital goods and raw materials, with the exception of a small negative list, would be removed.

The two Ministers then went to the PM’s residence for his approval. Rao apparently heard Chidambaram explain his proposals, asked Singh whether he agreed, and on getting Singh’s confirmation, signed the file. Ahluwalia has described it as one of the quickest policy packages, worked out in less than 12 hours, with no discussion in inter-ministerial meetings of officials, at the PMO, or in a GoM.

The announcement was made on July 4. Ahluwalia has said Chidambaram was quick to grasp the working of the export-import manual and policies, and once he realised the significance of it, “he ran with the ball”. Chidambaram’s willingness to let go of discretionary power vested in his Ministry was critical to the success of the reform.

The July announcement was followed by a detailed statement in August and, on April 1, 1992, the new trade policy was unveiled. It had been crunched to 100 pages, with a standout line — “Trade is free”. By then Ahluwalia had been moved to the Finance Ministry, and Chidambaram had a new Secretary — A V Ganesan, the famous negotiator for India in the GATT round in the 80s.

Much of that document was famously written by Chidambaram himself. Peak tariff, which was 355%, and average tariff of over 100%, was brought down in successive Budgets during that phase of reform, demonstrating close co-ordination between the Finance Ministry and the Ministry handling trade policy. This was also evident when the Exim scrips were replaced after a year, in 1992, by the dual exchange rate system and, in 1993, by a unified exchange rate system.

The economic philosophy driving the trade policy changes was that interventions should only be through tariffs, and not by imposing controls or placing fetters on imports or exports. The easing of licensing and a regime change was also reflected in the renaming of what was perceived as a notoriously corrupt organisation, the Controller of Imports and Exports (CCIE), to Directorate General of Foreign Trade. It helped that during the transition period, and immediately after major policy changes, the government engaged a lot with industry.

As Ahluwalia has pointed out subsequently, one of the key lessons from these policy changes was that if political decision-makers are willing to take risks, as was the case then, reforms would progress. It also made a difference, according to him, that Chidambaram was willing to give up discretionary power to ensure a more market-driven and transparent process, and the fact that there had been some consensus among economists on some of the major policy changes.

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