Impact of Trade Reforms on BOP | India | Economics

The trade reforms initiated in the country since the beginning of 1990’s were directed to achieve the basic objective of bringing about definite and permanent improvement in trade and payments situation in the country.

The impact of the liberalisation of trade policies upon the economy of the country is as follows:

Impact # 1. Shift Front Inward-Looking Trade Policies to Outward-Looking Trade Policies:

Upto the close of 1990’s the inward-looking trade policies were given much importance in India. The chief elements of such policies were import restrictions and import- substitution. The reliance upon such policies was primarily on account of the need of protection for industrial development, conservation of foreign exchange and the goal of self-reliance.

After 1991, the liberalisation in the field of trade laid emphasis mainly upon the policies directed to enlarge exports. The controls on imports were relaxed and incentives were given for expanding the productive capacity in export sector and for increasing the competitiveness of the export industries.

The country thus moved during 1990’s and in the current decade away from the inward-looking trade policies and started to adopt export-oriented or the outward-looking policies. Such policies brought about the rise in exports at relatively much higher rate than before.

Impact # 2. Balance of Payments:

Prior to 1990’s, country was faced with a persistent balance of payments deficit over the period from First Plan to the Fourth Plan; the BOP deficit of the country got enlarged from Rs. Rs. 42.3 crore to Rs. Rs. 2,221 crore. During the period of the Fifth Plan (1974-79), although the trade deficit was of the magnitude of Rs. Rs. 4,043 crore, yet there was BOP surplus amounting to Rs. 1,404.3 crore on account of large surplus of visible during that Plan period.

This was a sharp increase in BOP deficit during the period of the Sixth Plan (1980-85) and the Seventh Plan (1985-90). The BOP deficits during the period of the Sixth and Seventh Plans were of the order of Rs. 11,886 crore and Rs. 39,848 crore respectively. The country was faced with worst BOP crisis in 1990-91.

After the introduction of reforms in trade sector, there could be improvement in the balance of current account. In 1990-91, the deficit in balance of current account was of the magnitude of Rs. 17,639 crore. There was deficit both in respect of trade and invisibles in that year. After adopting the trade liberalisation policies, the deficit in the balance of current account started shrinking. By 2000-01, this deficit had gone down to Rs. 11,598 crores.

Although deficit in the balance of trade during that period had increased, yet the increasing surplus in invisibles brought about improvement in the balance of current account. Highly significant changes took place in the overall balance between 2003-04 and 2007-08. During these three years, the country had surplus in the overall balance. Thus during a period of 16 years, subsequent to the adoption of trade liberalisation policies, the country witnessed an improvement in the BOP situation.

However, the deficits reappeared in the year 2008-09, inspite of the fact that there was surplus in the account related to invisibles and capital account. In 2013-14, the trade balance and balance of current account were in deficit, yet the balance of payment was in surplus owing to a surplus in capital account. It seems the country is finding it difficult to sustain the positive impact of liberalisation policies upon balance of trade and payments.

Impact # 3. Inflow of Foreign Capital:

The inflow of capital takes place in India in the form of foreign direct investment, portfolio investment, external market borrowings, NRI deposits etc. During the period of 1st Plan, the gross and net inflows of capital were Rs. 201 crore and Rs. 174 crore respectively. During the period of Seventh Plan (1985-90), the gross inflow of foreign capital had risen upto Rs. 22,699 crore and the net inflow had increased upto Rs. 10,047 crore.

In 1990-91, when country was confronted with acute economic crisis, the gross and net inflows of capital declined steeply to Rs. 6,704 crore and Rs. 3,954 crore respectively. As a result of reforms in trade, foreign exchange and financial sectors, the foreign capital inflows started rising. In 1991-92, the gross and net inflows of foreign capital increased upto Rs. 11,615 crore and Rs. 7,380 crore respectively.

Between 1993-94 and 2004-05, net inflows of foreign capital could increase by 2.87 times. The inflows of foreign direct investments as well as portfolio investment declined in 2006-07 and 2008-09 respectively. The declining trend in portfolio investment was witnessed even upto 2013-14.

Impact # 4. Industrial Growth:

In 1991, apart from the trade sector reforms, new industrial policy, privatisation in industries and uplifting of industrial controls, generated the hope that the country would be able to achieve a high rate of industrial growth. During 1951 to 1965 period, the average growth rate of industries was 7.3 percent per annum. Between 1965 and 1980, the average annual growth rate of industries dwindled down to 4.3 percent. During the period between 1981 and 1990, the average annual growth rate of industries got revived to 7.45 percent.

The pattern of industrial growth has not been found to be satisfactory after the introduction of reforms. There was a fluctuating pattern of growth rate of industries in the economy. During the periods of the Eighth Plan (1992-97) and the Ninth Plan (1997-2002), it drifted down to 7.4 percent and 5 percent respectively. The year 2001-02 was the worst year from the viewpoint of industrial growth. The rate of industrial growth in that year got reduced to mere 2.7 percent.

The liberalisation in the sector of foreign trade led to exposing the Indian industries, which had subsisted in a protectionist regime for 40 years, to free international competition. The accelerated growth of imports coupled with slower growth of exports had a very detrimental effect not only upon export industries but also upon several complementary industries.

Besides this, fall in investment in public sector, difficulties connected with infrastructure, problems in the mobilisation of capital for expansion in capacity and anomalies in the structure of tariffs had adverse impact upon the performance of the industrial sector. The rate of industrial growth, however, rose to 5.7 percent in 2002-03. Subsequently, it increased further to 7.0 percent and 8.4 percent in 2003-04 and 2004-05 respectively.

The rate of industrial growth slumped down to 2.4 percent in 2008-09. It remained low throughout 2009. In 2009-10, the growth rate of manufacturing industries registered an increase by 11 percent. In 2013-14, the growth rates of mining and quarrying and manufactories stood at 5.4 and 5.3 percent respectively.

As regards the Total Factor Productivity (TFP) in the industrial sector, most of the empirical studies related to the periods before and after the trade and industrial reforms have revealed that there has been a decline in TFP in the Indian industries.

Impact # 5. Extent of Employment:

The reforms in the fields of foreign trade and other economic sectors had also created expectations that these would enlarge the employment opportunities in the country and would help reduce unemployment. Before reforms, the annual rate of increase in overall employment was 1.54 percent during 1983-84 to 1987-88 period.

The rate of increase of employment in the rural areas was 1.36 percent, while it was 2.77 percent in urban areas during that period. During 1987-88 to 1993-94 period, the annual rate of increase in overall employment was 2.43 percent. In both rural and urban areas, employment increased to 2.03 percent and 3.39 percent respectively. However, overall rate of increase of employment during 1993-94 to 1999-2000 period decreased to only 0.98 percent.

In the rural and urban areas, the rate of employment went down to 0.66 percent and 2.27 percent respectively during that period. On the basis of current daily status, the unemployment rates for males increased from 5.6 percent to 9.0 percent in rural areas and from 6.7 percent to 8.1 percent in urban areas between 1993-94 and 2004. Thus the impact of trade and other economic reforms was quite disappointing from the standpoint of employment.

Impact # 6. Economic Growth:

Before the adoption of trade and economic reforms, the annual growth rate of GNP at factor costs was 14.4 percent at current prices and was 5.8 percent at constant prices of 1993-94 during 1985-90 period. These rates increased to 16.3 percent and 6.8 percent respectively during 1992-97 period. However, both these rates declined to 10.7 percent and 5.5 percent respectively during the Ninth Plan period (1997-2002). In 2004-05, these rates stood at 11.9 percent and 7.6 percent respectively.

As regards the sectoral growth, the industrial and service sectors recorded a remarkable increase but the state of growth in agriculture had been a matter of serious concern. The growth rate of agriculture and allied activities was zero in 2000-01 and -6.9 percent in 2002-03. Between 2004-05 and 2007-08 although average growth rate of GDP was 8.9 percent, yet growth rate in agriculture and allied activities was disappointingly low at 3.9 over the same period.

In 2012-13, the economy registered a low growth rate of 4.9 percent. The GDP growth rates were estimated at 6.6 percent and 7.4 percent for 2013-14 and 2014-15 respectively.