Trade policy of a country refers to the set of policies which govern the external sector of its economy. In a developing country like India, trade policy is one of the many economic instruments which are used to suit the requirements of economic growth. The twin objectives of Indiaâ€™s trade policy have been to promote exports and to restrict the level of foreign exchange available to the government. The basic problem of a developing country such as India happens to be the domestic non-availability of certain crucial inputs like industrial raw materials, machinery and technology. This bottleneck can be removed through imports. Higher is the rate of development greater is the demand for imports. Though in the short run imports can be financed through foreign aid, in the long run imports must be financed by additional exports. The basic objective of trade policy, therefore, revolves round the instruments and techniques of export promotion and import management.
The importance of exports in the context of developmental planning was first recognized during the middle of the Second Plan Indiaâ€™s foreign exchange reserves built up during the Second World War faced a virtual exhaustion. The genesis of the crisis lay in the formulation of Second plan strategy itself which placed great emphasis on the development of capital-intensive industries in order to build up the infrastructure of the economy. This necessitated a large volume of imports which in the absence of a corresponding increase in experts resulted in a severe balance of payments crisis.
The policy of development through import substitution which was following in the Second Plan requires a continuous increase in domestic investments. Whenever there is a shortfall in the volume of investment, excess capacity occurs in the capital goods industries. This, in fact, is one of the basic reasons why a large number of firms which were primarily catering to domestic requirements were forced to look for export to improve their capacity utilization. The momentum for engineering goods exports really resulted from the domestic recession during 1967-69.
Since it was not possible to reduce the level of imports beyond a certain limit, the need for earning more foreign exchange was imperative. The problems associated with generating additional exports were primarily two fold:
1. Some of the principal export items of India are primary products for which the price and income elasticityâ€™s of demand are low, This is true of product like tea, jute manufacturers, lower quality cotton textiles, of items in any appreciable quantity. Side by side introduction of synthetic substitutes captured a part of the market which hitherto was catered to by natural products. This was especially true of jute products, including carpet backing.
2. With the increase in domestic incomes, the level of domestic absorption of mass consumption items increased. As a result, the quantum of exportable surplus recorded a decline. This is true of items like edible oils, sugar, tea etc. As a matter of fact, India turned into an importer of edible oils from position of an exporter during the planning period.
In view of the above constraints, it was found necessary that any items which could be exported should be exported, i.e. a conscious application of selectivity principle in line with comparative advantage was difficult to pursue. It was also necessary to restrict domestic consumption to improve the availability of exportable surplus. The Export Policy Resolution which was passed by parliament in 1970 stressed the need for restricting domestic consumption of certain items in order to generate adequate exportable surplus. This policy however, was revised later.
Efforts were also made to increase the exports of non-traditional items like engineering goods, chemicals, readymade garments, gems, and Jewelry etc. for which the overseas demand was high. Because of the relative advantage that the Indian manufacturers enjoy due to low labor cost, it was possible to increase exports of such items substantially, of course by extending necessary fiscal and financial support.
The Government has also tried to change the composition of export basket by increasing the export of higher value-added products. For example, India was traditionally a large exporter of semi-finished hides and skins but was a negligible exporter of finished leather and leather goods. The government, therefore, decided to restrict the export of semi-finished hides and skins by imposing quota restrictions and also levying export duties. Simultaneously, fiscal assistance was extended to the export of finished leather and leather manufactures, apart from making the import of leather machinery easy for increasing the production capacity.