Introduction || APPENDIX (CH-4) || APPENDIX (CH-9) || ANNEXURE (CH-12) || APPENDIX (CH-14) || APPENDIX (CH-24) || APPENDIX (CH-29) || Conclusion
Chapter- 1 || 2 || 3 || 4 || 5 || 6 || 7 || 8 || 9 || 10 || 11 || 12 || 13 || 14 || 15 || 16 || 17 || 18 || 19 || 20 || 21 || 22 || 23 || 24 || 25 || 26 || 27 || 28 || 29 || 30 || 31 || 32 || 33 || 34 || 35 || 36 || 37 || 38 || 39

Chapter 30:
FOREIGN TRADE AND COMMERCIAL POLICY

Commercial policy in the widest sense of the term covers a variety of problems. For nstance, the pros and cons of multilateralism, the principles to be applied in protecting domestic ndustries, the relative advantages of quotas, bilateral trade agreements, and bulk purchasing can all in one way or another be considered as coming within the purview of commercial policy. The scope of this chapter is however more limited. It is intended to bring out the likely effects of the Plan on the structure of foreign trade and the considerations that will have to be borne in mind in framing import and export programmes in the period of the Plan.

Role of Commercial Policy in Planning

2. Commercial policy thus penned has to serve the following ends in the context of planning :

1. it must help to fulfil the production and consumption targets in the Plan ;
2. the accent of policy throughout must be on maintaining a high level of exports ;
3. the deficits in balance of payments must be kept within the foreign exchange resources at the disposal of the country in any given period ;
4. the composition of exports as well as of imports must, as far as possible, fit in with the fiscal and price policies which have to be followed for the implementation of the Plan; and
5. there must be, to the extent practicable, a measure of continuity ia policy so that trade relations with other countries in respect of exports and imports and the plans of domestic industry and trade are not frequently disturbed.

3. Conditions of foreign trade, as is well-known, are apt to change frequently and sometimes violently. Precise year by year targets for exports and imports over ihe period of the Plan would therefore serve little purpose. There is also the additional factor that the timing and magnitude of external assistance which might be available cannot be precisely foreseen. The five guiding prin:iples mentioned above will, however, in any given set of circumstances, indicate broadly the appropriate policy which has to be followed. For instance, if foreign exchange resources are limited and are barely sufficient for the imports essential for the implementation of the Plan, imports of less essential commodities will have to be restricted and measures taken to promote exports to the extent necessary. Such exports should not involve any significant diversion of resources from production in important lines. A deterioration in foreign exchange resources must preferably be met by decreased domestic outlay on consumer goods which are cither imported or can be exported without detriment, rather than by a reduction in planned investment. A great part of the revenue of the Government from import duties is derived from imports of "non-essential" goods. If these have to be restricted, alternative ways of raising the necessary resources for the public sector have to be devised. It is also possible that the commodities for which there is a ready market abroad may be those which are essential internally for the implementation of the development programme. Regulation of foreign trade aimed at cutting down imports and promoting exports will therefore have to keep these factors also in view. If, on the other hand, the foreign exchange resources of the country are supplemented from other sources, it will be necessary to ensure that the additional imports permitted are such as will most effectively support the development programme; this will no doubt mean concentrating to a great extent on imports of producer goods (including law materials) but consumer goods (particularly foodgrains) will also be required to meet inflationary pressures generated by the programme. In periods of relatively easy foreign exchange supplies the need for export promotion will be less evident, but it will be necessary to have the long range objectives of commercial policy in view and to refrain from measures which endanger the market for the country's exports in the future.

4. These are matters in which there must necessarily be a measure of flexibility in policy. It is however necessary to adhere to the broad principles indicated above and to adapt policy to the changes in the volume, composition and direction of foreign trade anticipated in the period of the Plan. There have also been a number of changes in India's foreign trade in the last decade or so which are perhaps as relevant to obtaining a perspective of the problem as the changes that are likely to be brought out as a result of the Plan itself. The following paragraphs are therefore devoted to a general analysis of these changes so as to bring out the considerations in the light of which commercial policy will have to be framed in the period of the Plan.

DETERMINANTS OF POLICY : PRE-WAR AND POST-WAR

5. Before the war, India was a net debtor country and had to have a surplus of a fairly large order in its trade accounts in order to meet the servicing charges on the sterling debt. This was therefore the key to its commercial policy. In the wider pattern of international balance of payments, India was among the group of countries which were net dollar earners and made over those earnings to the metropolitan countries of Europe in payment for the deficits which they had with them. It was a member of the sterling area, one of the main objectives of which was to expand trade within the area while preserving the stability of sterling as an international currency ; under the conditions that prevailed in the thirties, this meant that a certain measure of discrimination in trade was unavoidable. In so far as the discriminatory principle was implicit in arrangements like Imperial Preference, it was an important factor which also affected commercial policy.

6. By the end of the war, almost the entire external debt of the Government was repaid and balances of the order ofRs. 1600 crores had been built up in sterling. This obviated the necessity for having a surplus on trade account. The magnitude of the external reserves accumulated during the war opened up in fact the prospect of being able to finance fairly large deficits in balance of payments. But the post-war difficulties of the United Kingdom placed a limit on the rate at which the sterling balances could be drawn upon. The distinction between soft and hard currencies, ard India's added interest as a 'creditor' country in the stability of sterling, also necessitated the continuance of discriminatory practices in trade with the dollar area.

7. Since the sterling balances were largely the result of restricted consumption and investment and not a reflection of any permanent improvement in productivity in the economy the problem of balancing trade at the end of the war was in a sense more difficult than before it. The financing of the war had increased money incomes but consumption had been kept down by scarcities and price rises. In industry and transport there had been not only little net addition to capital equipment during the war but even normal depreciation requirements had to be postponed. On the conclusion of the war the economy was in a starved condition, and it was necessary to provide for imports on a large scale to make good the results of war-time austerity and depletion of capital, not to mention the needs of development.

8. Even apart from the pressure of pent-up demands, the import requirements were larger and exportable surpluses smaller at the end of the war. This was on account of the increase in population in the interval and the partition of the country which enlarged the country's deficit in food and raw materials. Changes necessitated by wartime requirements in the pattern of production also aggravated the difficulty. These changes were responsible for a sharp contraction in the exportable surpluses of staple commodities like raw cotton and raw jute. Oil-seeds and pig iron were also required in large quantities to meet increased domestic industrial needs. The decline in the exports of these commodities was to some extent counter-balanced by increased exports of primary products like spices and mica and of semi-manufactures such as vegetable oil, but the volume of exports in 1946-47 was still only about two-thirds of the prewar level.

9. Partition affected most the exports of jute, cotton, and hides. In the new set-up, large scale imports of these were essential for some of the largest established industries in India. But the commodities that could be exported to Pakistan in exchange were mainly processed materials like cotton textiles, sugar, and matches which, until Partition, were receiving some protection against foreign competition in the areas which now constitute Pakistan. Partition therefore not only resulted in increased reliance on imported raw materials but made more difficult the problem of export promotion.

EFFECTS OF THE WAR AND THE PARTITION ON PATTERN OF TRADE

10. The changes brought about by the War and the Partition in the pattern of India's foreign trade will be evident from the following table, which shows for selected years the percentage shares in exports and imports of three main groups of commodities:

11. The increase in the exports of manufactured articles, it will be noted, is ^more apparent than real; it is explained mainly by the relative increase in their importance consequent on the sharp decline in the exports of raw materials. In absolute terms, the volume of exported manufactures was only about six per cent higher in 1948-49 than a decade earlier, and even this improvement was mainly on account of the increase in exports of cotton manufactures through reduced per capita domestic consumption. The apparent reduction in the imports of manufactured articles is also relative. It will be seen from the following indices of export and import quantities that there were significant changes in the volume of trade only in respect of raw materials and of imported food:—

12. Within the category of manufactures, there was a significant increase in imports of machinery. This was not very pronounced in the early post-war years on account of the difficult supply position abroad ; a time-lag was also inevitable between placing of orders and delivery in the case of heavy capital equipment. The process of meeting current requirements and overtaking past arrears could be said to have begun only in 1947-48. By 1949-50, the value of imported machinery had risen to about Rs. 103 crores from the pre-war level of about Rs. 19 crores but the lag in arrears to be made up was still large.

SHIFTS IN THE COMPOSITION AND DIRECTION OF TRADE

13. There were two further developments in this period which are significant from the point of view of commercial policy, one relating to the composition of exports and the other to the direction of trade. In 1938-39, jute manufactures, cotton manufactures and tea accounted for only about 35 per cent of the total value of India's exports. Of the rest, raw cotton, raw jute, oilseeds, hides and skins, metals and ores and raw wool contributed as much as 40 per cent. In the following decade this distribution became much more uneven. By 1948-49, the share of jute and cotton manufactures and tea had risen to over 56 per cent, while the contribution of the latter group fell to less than 15 per cent; The increased dependence on a few commodities not only introduced an element of instability in export prospects but was bound to weaken the country's position in regard to larger questions of policy.

14. Secondly, before the war, over half of India's foreign trade was with countries which now constitute the sterling area ; only about ten per cent on average was with the dollar area, while the rest was distributed between a number of countries in Europe, the Middle East and the Far East which did not fall in either of these groups. In the following ten years, the share of the sterling area (excluding Pakistan) became somewhat smaller. Trade with Germany and Japan also declined sharply. The result, as will be evident from the table below, was to increase the share of the dollar area to about a quarter of the country's total foreign trade.

15. On the side of exports there was no significant compositional change in the trade with the dollar area, except that new commodities like cashewnuts, manganese ore, and spices assured greater importance as dollar earners. But the pattern of imports changed considerably in this period, mainly on account of the greater dependence on this area for supplies of food-grains and developmental commodities. These changes are reflected in the trade between India and the United States.

*Dollar area here covers the whole continent of North, Central, and South America and adjacent islands (excluding Brazil, Chile, Uruguay, Peru and European possessions) together with tlie Philippines.
**0tlier hard currency countries as defined here include Belgium and its possessions, Portugal and its possessions, Oermany and Japan.

THE IMPACT OF THE PLAN ON VOLUME OF FOREIGN TRADE

16. In formulating the commercial policy during the period of the Plan, these changes in the last few years in the volume, composition and direction of foreign trade have to be kept in mind. The contraction in the volume of exports, the increased dependence on imports of food and raw material, the lag in replacements of machinery and capital equipment, the excessive reliance on a few markets partly on account of insufficient diversification of exports, and the imbalance in the trade with the dollar area, will all tend to restrict in the initial stages the scope for making any radical changes in policy. To an extent the Plan itself is designed to meet some of these problems. The higher production of agricultural raw materials like jute and cotton provided for in the Plan will reduce the dependence on imports relatively to the level of domestic production of manufactured products like jute and cotton textiles, and increase the exportable surpluses of the latter. The arrears in capital expenditure accumulated during the war will also by and large, have been made up in the course of the five years. The recovery of Germany and Japan, and the possibility of developing greater trade relations with countries like Czechoslovakia and Sweden which can export capital goods, will help to diversify trade and partly correct the existing imbalance with the hard currency countries. It is also to be expected that as_ new lines of manufacturing industries develop in India, the trend already noticeable in recent years for exports of sewing machines, batteries, textile machinery, electric fans, bicycles, etc., to countries in South-East Asia will also be strengthened.

17. As outlined earlier, the Plan aims at meeting the rising consumption requirements of a population which will be growing at the rate of about i^ per cent per annum. It also envisages raising the level of investment expenditure per annum in the economy by well over 50 per cent. The higher domestic requirements which these targets imply are bound to make themselves felt in increased demand for imports as well as in reduced surpluses of consumer goods and raw materials. Similarly, while the demand for capital goods on account of arrears in.depreciation may fall off, it will be more than made up by the greater requirements of new development projects.

18. There would, in other words, be two forces at work as far as foreign trade is concerned, one tending to lessen the pressure on foreign exchange and the other tending to increase it. Both effects would follow from- the Plan, the fest from the production targets and the second from the consumption and investment targets. To the foreign exchange implications of these factors, and the manner in which they are related to the need for supplementary external resources, reference has already been made in Chapter III.

19. Any assessment of the effect of a programme of development on foreign trade must necessarily be related to the consumption, production and investment targets in the programme. As pointed out in Chapter III, we have for this purpose proceeded in the first instance on the assumption of a developmental outlay by the Government of the order of Rs. 1,700 crores (i.e., an outlay which could be more or less met from the budgetary resources of the Central and the State Governments, some deficit financing, and the external assistance already received). The effect on exportable surpluses and on import requirements of the further outlay necessary in order to reach the target of Rs. 2,069 crores in the Plan is left for being taken into account at a later stage. On this basis, it has been estimated that the volume of India's exports is likely to increase by nearly 30 per cent by 1955-56 as compared to 1948-49 and by over 10 per cent as compared to 1950-51 (which was a boom year for exports). The volume of 1955-56 will on the other hand be about 18 per cent more than in 1950-51 (when imports were on a somewhat smaller scale than usual on account of international conditions) but only 3 per cent more than in 1948-49 when the Open General Licence for imports was in fuii operation. The relatively smaller increase envisaged in the case of imports is a measure of the rigorous import controls on consumer goods that have been assumed in the estimates.

CHANGES IN COMPOSITION OF TRADE IN THE PLAN PERIOD

20. The increase in exports is expected to take place mainly in cotton piecegoods, jute yarns and manufactures, manganese ore, oils, coal and coke, black pepper, tobacco, coir manufactures and woollen manufactures. The estimates in respect of these are as follows :

In addition, there are a number of newly-developing lines of exports which are expected to show significant progress in this five-year period e.g., sewing machines, textile machinery, electric fans, bicycle?, scorage batteries, small machine tools, dry cells, soap, chemicals, cement, and paper and par er boards. To encourage this diversification of exports, particularly ot manufactured articles, it would be desirable to simplify ind extend as far as possible the syste n of granting rebates of import duty on raw materials used in manufactures.

21. Exports may remain at about the same level as in 1948-49 in the case of some commodities like tea, cotton waste, mica and lac, either as a result of production remaining constant or internal requirements increasing. In a few instances, where the increases in internal demand for manufacturing purposes or for direct consumption are likely to outstrip internal availabilities in the initial stages, exports may fall lower than in 1948-49 though even here the tendency by and large would be for the exportable surpluses to fall heavily in the initial stages and then to increase as the Plan progresses.

To a great extent, the declines under these would also be made up by increased exports of the manufactured products or by decreased imoort requirements.

22. The effect of the Plan on imports is more difficult to specify cummodity-wise. The volume of imports at each stage in the implementation of the Plan as well as at the end of the five years would depend to a great extent on the degree of control exercised over them, which in turn would be determined by the availability of foreign exchange. It is difficult, in particular, to forecast the precise requirements by way of food imports by the end of the Plan as they will have to be adjusted from time to time to the level of investment outlay in the country and the pressures it tends to generate. Provisionally it has been assumed that about 3 million tons of foodgrains would have to be imported every year in the period of the Plan. As indicated in an earlier chapter, shortage of foreign exchange resources seems at present likely to be a serious bottleneck if a development programme in the public sector of the order of Rs. 2,069 crores is to be implemented without supplementary external resources. In this eventuality, imports will have to be restricted to commodities with the highest priority and this is likely to have its repercussions on the economy. If, on the other hand, additional foreign exchange resources became available in the period of the Plan, it would be possible to have larger imports.

23. If producer goods are dedned so as to include unprocessed and partly processed raw materials as well as manufactures and semi-manufactures used in production, they have in recent years constituted about two-third of total imports into India. The Plan will on the whole tend to reduce the dependence on imported agricultural raw materials. Imports of raw jute, in particular, are expected to fall from the level of 42 lakh bales in 1948-49 to around 9 lakh bales per annum by the end of 1955-56. But imports of processed raw materials will have to be stepped up considerably for meeting the production targets in the Plan. In spite of the development of petroleum refining and of the power alcohol industry in this period, imports of oil, for instance, may have to be maintained at a high rate upto 1955-56 when domestic production of mineral oil will help to reduce these to a considerable extent. The development of the rayon industry envisaged in the Plan would need about 15,000 tons of rayon grade pulp to be imported every year. The fertiliser industry would also require imports of rock phosphate of the order of 108,000 tons per annum by 1955-56. Petroleum refining would similarly require imports of crude petroleum to the extent of 1.7 million tons. The only significant exception is likely to be staple fibre, in whose case the expected increase in production by over n million Ibs. would reduce considerably the dependence on imports by the end of the Plan.

24. The effect of the Plan on imports of manufactures and semi-manufactures (including intermediate products) used for production would by and large be the same as on imports of processed raw materials. Imports of locomotives for replacement purposes are likely to be completely eliminated. In a few cases where the projected expansion in domestic production is likely to exceed the increase in domestic requirements, imports may tend to fall, e.g., in respect of fertilisers, aluminium, cement, and artificial silk yarn. But in all others, and particularly in the case of capital equipment, heavy durables and metals (iron and steel, copper, zinc and tin) there will be significant increases in the level of imports.

25. The broad pattern of foreign trade that is likely to emerge as a result of the Plart is thus clear. It hardly needs stressing that if external resources are not forthcoming to supplement the normal foreign exchange earnings of the country and the agreed releases from the sterling balances, the balancing of external accounts will be placed under strain in the period of the Plan. This will inevitably have its repercussions on commercial policy and, in fact, on every aspect of the economy. If on the other hand, supplementary external resources become available, responsibility of another kind will be placed on the conduct of commercial policy. By appropriate adjustments in exports and imports, it will be the function of commercial policy to ensure the most effective utilisation of such resources without adversely affecting either the domestic industries or the country's export prospects in the future.

26. The markets for India's exports and the sources of its imports would depend to a great extent on price movements abroad as well as on the availabilities of the commodities themselves. It is clear that efforts will have to be made to increase the volume of exports not only to the dollar area but also to other countries which are in a position to supply the imports required for the implementation of the Plan. The objective of commercial policy must be to maximise, in step with other countries, the volume of world trade. As long as conditions are not favourable for multilateral trading to achieve this, the objective will have to be pursued as best as is possible by mutual agreement between groups of countries for expanding the volume of trade between them, and commercial policy in the period of the Plan will have to be adjusted accordingly.

27. It will be seen from what has been said above that apart from the possibility of having to maintain and enter into bilateral or zonal agreements, it would be necessary also in the period of the Plan to have a close regulation of imports and exports. While continuity of policy is essential in the administration of import and export controls, it cannot be gainsaid that without controls in a vital sector like foreign trade the country will not be able to utilise to the maximum advantage 'the resources available to it for development.