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Chapter 5:
FOREIGN TRADE

A major constraint on the Fourth Plan is the availability cf external resources. A net inflow of external assistance of the order of Rs. 1,850 crores is postulated during the Plan period, as compared to a net inflow of Rs. 3,500 crores (in post-devaluation rupees) during the Third Plan. With this greatly reduced net external assistance and a substantially larger investment programme during the Fourth Plan, the balancing of the external account would call for much greater efforts than jn the past in the direction of both export expansion and impart savings and substitution.

Exports

5.2. India's exports were virtually stagnant during t'nc decade 1951-60. Total exports averaged Rs. 606 crores a year during the First Plan period and Rs. 609 crores a year during the Second Plan. In contrast with this stagnation, exports showed a striking expansion during the first three years of the Third Plan. There was, however, a slowing down in the growth of exports in the fourth year. In the last year exports recorded a small fall of Rs. 10 crores as compared to the previous year, due mainly to the bad harvest and Pakistan-India hostilities. The level of exports rose at an annual compound rate of 4.1 per cent from Rs. 660 crores in 1960-61 to Rs. 806 crores in 1965-66.

5.3. There was a significant change in the commodity composition and directional pattern of exports during the Third Plan. The share of the three principal traditional commodities—tea, cotton textiles and jute manufactures—in total exports declined from 48 per cent to 44 per cent. There was, however, a substantial growth in a number of export commodities like oilcakes, fruits and vegetables, sugar, iron ore. iron and steel, handicrafts and engineering goods. Moreover, several new export products principally in the engineering and chemical fields emerged for the first time. The trends in exports of the principal commodities during the Third Plan are shown in table 1.

Table 1: Export of Principal Commodities during the Third Plan and 1966-67 to 1968-69
(Rs. Crores)

*The figers for 1965-66 and April-May 1966 are in post-devaluation rupees i.e., after escalation by 57.5 %.

5.4. There was a considerable increase during the Third Plan in exports to East European countries, especially the U.S.S.R. and also a sizeable increase in exports to the U.S.A. Exports to West European countries recorded a small decline owing to a reduction in exports to the U.K.

5.5. The dynamism in India's exports during the Third Plan period is attributable to the increase in the production base, both agricultural and industrial. and the generally favourable climate of international trade. In addition to these factors, a significant rola was played by institutional, fiscal and other measures adopted as part of a deliberate and conscious policy to promote exports. The institutio'nal frame work for promoting exports was broadened and strenthen-ed through the setting up of the Board of Trade, Export Promotion Councils and the Minerals and Metals Trading Corporation. A major factor was the operation of special export promotion schemes providing import entitlements against exports in respect of a number of manufactured and processed products. A variety of fiscal measures were also adopted to bring about an expansion in exports. Incentives in the form of drawback of import duty ?.nd refund of excise duty were extended to a number of commodities. A Marketing Development Fund was established to provide grants to the Export Promotic.Tt Councils for the exploration and development of foreign markets for export commodities. A scheme for the issue of tax credit certificates to exporters covering 22 items was introduced.

Revaluation of the Rupee

5.6. In order to bring domestic prices in line with external prices, to restore and enhance the competitive power of exports, and to provide a solution. to the country's trade and payments problems, the par value of the rupee was reduced by 36.5 per cent on June 6, 1966, involving a rise of 57.5 per cent in the price of foreign exchange in terms of Indian rupees. Along with devaluation, the existing special export promotion schemes providing import entitlements against exports and the scheme for tax credit certificates were abolished. Moreover, in order to protect the unit values of exports in terms of foreign exchange, export duties were levied on a number of commodities, mostly agricultural commodities and agriculture-based manufactures. A variety of additional measures were taken to promote exports. A liberal import policy was announced for 59 priority industries, including a number of export-oriented industries. A new import replenishment scheme enabled registered exporters to obtain raw materials, components and spares against export of specified products. If was decided to provide cash assistance for exports of selected products with a good export potential. A scheme for the supply of steel at international prices to exporters of engineering goods was announced. Imports of some raw materials were placed under an Open General Licence.

Annual Plans

5.7. Exports during 1966-67 aggregated to Rs. 1157 crores (S 1588 million) which were lower by 8 per cent than exports during 1965-66. In the subsequent two years exports rose to Rs. 1199 crores and Rs. 1360 crores respectively. The trends in exports of principal commodities during these three years are shown in table 1.

5.8. The decline in exports in 1966-67 was mainly due to drought conditions and the conse quent supply constraints on export of agricultural of leather manufactures (excluding footwear) and jute manufactures. In the group agriculture and allied products, the main increases are postulated in fish and fish products and cashew kernels.

5.18. An essential pre-condition for the fulfilment the export programme is the realisation, according to schedule, of the production target set in the naricultural, mineral and industrial sectors. Moreover, while care has been taken in setting the pro-:etion targets to allow in general for an adequate normal growih in domestic consumption concur-:.iy wi'ih the postulated growth in exports, in the case of some commodities it may be necessary to sirain the growth of consumption through fiscal ; r ether measures in order lo make adequate surpluses available for export. Since export promotion ss a dynamic process which takes place under constantly changing circumstances—internal as well as external—there is need to keep the requirements of exports constantly in view in licensing additional industrial capacity as aiso in permitting diversification of. capacity. Another important pre-condition of success in achieving the expon goals during the Fourth Plan is the maintenance of reasonable internal price siability. In the interest of promoting expons regulatory or restrictive measures in the form of outright bans or export quotas should be kept to the minimum, specially in the case of primary agricultural products, unless there are overriding considerations to justify such action.

5.19. On the front of export policy designed specifically to pi-Jvidc f^ciliti,:s and incentives to exporters, it is 01-' primary importance to ensure stability ia the structure that has been evolved over the years since devaluation. At the same time it is necessary to provide a measure of flexibility in the basic framework so that the problems created by changes in conditions abroad cr in the domestic economy can be ell'ectively met.

5.20. Competitiveness in cost and quality is an important prc-requisite of success in the export ell'ort particularly in the case of manufactured products. Constant and determined efforts will, therefore, need to be made for improving efficiency and reducing costs. Attention will have to be paid to the improvement of the quality of export products line; with technological developments abroad.

5.21. Improvement in port and shipping facilities is of vital importance in the promotion of exports, particularly of bulk commodities. The Fourth Plan provides for the development of major ports and their modernisation and re-equipment. Handling, loading and berthing facilities at the ports are being improved. The development of outer hdrbcur facilities in major ports at strategic intervals on India's coastline will improve bulk handling and attract deep draft heavy tonnage ships. Special aneniioil will also be given to the enlargement of the shipping tonnage in view of the growing volume foreign trade.

5.22. In the case of major traditional exports like cotton textiles and jute manufactures, adequate provision has been made for modernisation and rehabilitation of manufacturing units as part of the export promotion effort. Similarly, funds have been provided for replantation of tea bushes and modernisation of processing and packaging facilities. In the case of certain traditional items particularly those facing competition from synthetics, further programmes for industrial research will be necessary. For increasing exports of non-traditional items, special emphasis will be placed on wider publicity and adequate after-sale service. Efforts for the location and development of export markets will have to be intensified. Technical asid financial assistance, along with deferred payment terms, for facilitating exports of machinery and equipment to developing countries will be strengthened.

5.23. The present institutional framework for exp'~it promotion is sound and has contributed to ;nc .Scvelopment of exports. It may, however, ke !-.ece;sary to strengthen from time to time certain constituent elements cf this structure as the need n'iay arise. In particular, ii. is visualised that the public sector will play an increasing role in export fade. Moreover, since there has been a substantial expansion of the public sector in the industrial fields nofab!y metallurgy, engineering and chsmicals, ;l is expecte,:; that exports from public sector enterprises wil( increase progressively. The role of co-'.pa^ive organisation.; of proved ability in the Leia cf export trade will be encouraged.

Imports

5.24. Except (Jurins the year of the Korean War, !°5i 52. impons averaged Rs. 652 crores during . four years of the First Plan. The imports was substantially higher during inc Secotd Plan period when it averaged Rs. 976 crores a year.

5.25. During the Third Plan period, there was a sustained rise in the level of imports except in 1961-62 when imports fell by Rs.33 Crores to Rs. 1107 crores. Imports rose progressively duirng the next four years, reaching a level of Rs. 1409 crores in 1965-66. Over the Third Plan, imports averaged Rs. 1245 crores a year.preparations, which were imported largely under the PL 480 programme, were an important component of total imports. Imports of fertilisers (crude and manufactured) recorded an almost continuous rise. Imports of iron and steel and non-ferrous metals, taken together, declined during the first two years but rose in the subsequent years. Imports of mineral fuels, lubricants and related materials, which showed an upward trend during the first three years cf the Plan, declined in the last two years as a result of increased internal production. Imports of a number of other commodities such as chemical elements and compounds, medicinal and pharmaceutical products, dyeing, tanning and colouring materials, rubber, synthetic yarn, raw 'cotton and raw jute recorded significant declines as a result of the efforts made to replace imports by domestic production and the restrictive import policy followed during the period. Imports of machinery, spares and components showed a strong upward trend. In the case of transport equipment, on the other hand, the average level of imports was slightly lower than the level recorded in 1960-61.

5.27. As for the directional pattern of India's imports during the Third Plan there were substantial increases in imports from the Americas and East Europe. The U.S.A.'s share in India's imports rose from 28.7 to 30 per cent. The share of East Europe increased from 3.9 to 11.1 per cent.

Table 2 :Imports of Principal Commodities during the Third Plan and 1966-67 to 1968-69
(Rs. crores)

Devaluation and Import Liberalisation

5.28. Mention has been made of the devaluation of the rupee in June. 1966 and of the related measures to promote exports. On the side of imports, the principal policy measure taken with devaluation was the announcement of a 'liberal import policy for 59 priority industries under which arrangements were made to meet their requirements for raw materials, components and spares in full (initially for six months). The import policy for small-scale industrial units making the same products as the priority industries was also substantially liberalised. The import policy introduced in 1966-67 was continued in ifs basic essentials in the following two years. The policy for 1967-68 was made need-based and production-oriented and provided for the continuation of the preferential treatment for the 59 priority industries. The policy for 1958-69 placed 260 items or groups of items on the banned list since these commodities could he supplied in sufficient quantity from domestic production. Imports of another 197 items were allowed to actual users on a restricted basis as the domestic production of these items had increased substantially.

Annual Flans

5.29. Imports in 1966-67 aggregated to Rs. 2078 crores' as compared to Rs. 2218 crores (in post-devaiuation rupees) in 1965-66, showing a reduction of 6.3 per cent. In 1967-68 and 1968-69, imports declined further to Rs. 2008¹ and Rs. 1862' crores respectively. The trends in imports of principal commodities during the years 1966-67 to 19'68-69 are shown in table 2.

5.30. The decline in total imports by Rs. 140 crores in 1966-67 is mainly attributable to the substantial reductions under iron and steel and non-ferrous metals, machinery and transport equipment, mir.eral fuels, lubricants and related materials and raw cotton. On the other hand, cereal imports increased by as much as Rs. 144 crores to Rs. 651 crores. A major factor responsible for the decline was the higher rupee cost of imports following devaluation. The restrictive import policy pursued in the latter half of 1965-66 also contributed to the decline in imports.

5.31. The further reduction of Rs. 71 crores in total imports in 1967-68 was mainly the outcome of a reduction in cereal imports which was rendered possible by a substantial increase in domestic production of foodgrains. Non-cereal imports, on the other hand, recorded an increase of only Rs, 62 crores in 1967-68. There was a continued decline in imports of machinery in that year while those of transport equipment recorded a moderate increase. The small increase in non-cereal imports,'Uoadjuted customs data.particularly in industrial raw materials and machinery, is attributable to the slackness in investment and industrial activity and the substitution of a variety of machinery and other import commodities by domestic production. The conditions of 1967-68 continued in 1968-69 when the reduction in total imports was mainly a result of the decline in cereal imports which fell by as much as Rs. 182 crores. Non-cereal imports did not show any significant change.

5.32. While total imports underwent a significant contraction between 1966-67 ard 1968-69, there were no marked changes in the shares of the different regions in India's imports. Imports from East Europe and Africa recorded an absolute increase during the three-year period. Thte share of East Europe in India's imports rose from 11.1 to 16.2 per cent and that of Africa from 4 to 8 per cent.

Import Requirements

5.33. Tile total import requirements of the economy during the Fourth Plan period are estimated at Rs. 9730 crores. These are made up of Rs. 590 crores of food imports (including those under PL 480 arrangements); Rs. 7840 crores of maintenance imports or imports of raw materials, components and spares needed for sustaining and accelerating the growth of industrial and agricultural production; and about Rs. 1300 crores of project imports.

5.34. The maintenance import requirements totalling Rs. 7840 crores include major items such as fertilisers and fertiliser materials, POL, chemicals, non-ferrous metals, special varieties of steel, components and spare parts of machinery. In making estimates of maintenance imports, various assumptions have been made. It has been assumed that aii possible steps will be taken to ensure that the targets of production in the agricultural. mineral and industrial fields are achieved according to schedule. The second assumption is that the present restrictions on imports of consumer goods will continue. Thirdly, it is postulated that raw material requirements of consumer goods industries will continue to be severely restricted unless these are specifically required for export production. Fourthly, strict economy will be exercised in the use of certain commodities like kerosene. newsprint and paper where demand may continue to exceed supplies. Fifthly, as regards non-ferrous metals for which the country has either limited or no natural resources, it is assumed that all possible efforts will be made to economise their use through the adoption of processes and technologies which require smaller quantities of these metals per unit of production and through substitution by domestically produced metals, as zinc and copper by aluminium.

5.35. So far as the production of capita] goods is concerned, the assumption is that in line with the present import policy, the entire demand of these industries for imported ray materials, components and spares will be met. At the same time, it is assumed that effective policy measures would be taken to ensure the maximum use of indigenously produced machinery, specially in view of the wide and diversified engineering capacity already built up in the country. The present import policy in regard to components and spares would be of help in increasing the supply of complete plant and machinery from indigenous production.

5.36. More than half of the requirements cf maintenance imports during the Fourth Plan period will be on account of iron and steel, non-ferrous metals. POL (crude ad refined), fertilisers (including fertiliser materials) and components and spares for machinery and transport equipment. With the increase in industrial production and overall growth in the economy, requirements of such materials, intermediate products and components would increase significantly from year to year. Imports of chemicals, drugs and dyes and newsprint, paper-board and pulp are expected to show only a nominal increase. Imports of agricultural raw materials are likely to show a generally declining trend.

5.37. Project imports have been estimated on the assumption that the requirements of complete machinery, plant and equipment would be met largely from domestic production and that only plants and machinery of the more complex and sophisticated kinds which are yet to be produced within (.he couniry will be imported. The major part of project imports is accounted for by the three sectors of industry and minerals, transport and communications and irrigation and power.

5.38. An important assumption underlying the import estimates is that the basic ingredients of the import policy evoived in the years since devaluation would be continued, so that linberal import facilities for the priority industries, export industries and units and the small-scale sector would be provided. With the expansion of production in the different seciors and the efforts to be made to promote exports, the requirements of essential imports of raw materials, components and spares will grow. It would, therefore, be necessary, to keep the total import bill within the limits determined by the likely availability of foreign exchange resources. A deter mined and sustained drive will have to be undertaken towards import substitution and rationalisation. It would be appropriate to give special attention to bulk areas like POL, metals, fertiliser and machinery and equipment of all kinds, since progress in import '•ub and iitution in these areas would result iii sizeable savings of foreign exchange. It will be desirable to review periodically the efforts made in the field of import substitution, to keep a watch on progress achieved, to provide guidelines and to identify new areas where import substitution is feasible.

5.39. In line with the Government's recently announced policy to canalise progressively imports of industrial raw materials through state trading agencies, it would be necessary to undertake studies of the various categories of industrial raw materials which are now being imported and to devise an appropriate time-schedule for the progressive canalisation of their imports.