Coupon Accepted Successfully!


Reforms in the external sector

India faced the crisis of deteriorating balance of payments in the late 80’s and early 90’s. To rectify this situation, devaluation was carried out, which was followed by the announcement of new foreign trade policies and foreign trade reforms. Some of the measures taken to reform the external sector include:
  • Exchange rate stabilisation: The rupee was devalued twice in July 1991 amounting to a cumulative devaluation of 19%. In 1994, various types of current account transactions were liberalised from external control regulations with some limits. There was some relaxation in exchange controls for certain capital account transactions.

Note: Devaluation refers to the lowering of the external value of the country’s currency. It is undertaken by the Government.

  • Foreign investment: The new industrial policy and subsequent policy announcements liberalised the existing industrial policy which led to liberalisation of FDI with foreign technology agreements.
  • Import licensing: The EXIM policy allowed free trade of all items except the negative list of exports and imports. The EXIM policies of 1997-02, 2002-07 and 2004-09 further trimmed the list by removing certain items. There has also been a reduction in the number of import licenses.
  • Quantitative Restrictions (QR’s): Quantitative restrictions have been removed for all kinds of imported consumer goods, except defence goods, sensitive goods, environmentally hazardous goods. QR’s were removed on 714 items in the EXIM policy of 2000-01 and on remaining 715 items in the EXIM policy of 2001-02. The EXIM policies of 1997-02, 2002-07 and 2004-09 further trimmed the list making a very small number of sensitive items subject to QR’s.
  • Tariff: Indian import tariff structure was among the highest in the world till 1991. India lowered its average applied tariff rate from 125% in 1990-91 to 41% in 1995-96 and to 10% in 2007-08. (See chart 3)

  • Export subsidies: Export subsidies are provided to Indian exporters indirectly in the form of duty and tax concessions, export finance, export insurance and guarantee and export promotion marketing assistance. The Cash Compensatory Scheme was abolished in July 1991. With the introduction of the dual exchange rate scheme, the EXIM scrip scheme was abolished. A special scheme called the Export Promotion Capital Goods (EPCG) scheme was introduced in 1990 and liberalised in April 1992. This aimed at encouraging importing of capital goods. Exporters avail additional benefits from the EPCG scheme under the EXIM Policy 2004-09 and 2009-14.
  • Special Economic Zones (SEZs): It was introduced in the year 2000. SEZ ACT, supported by SEZ rules, came into effect in 2006 for the generation of additional economic activities, promotion of investment, creation of employment opportunities and development of infrastructure facilities.
  • Foreign exchange reserves: Foreign exchange reserves have been steadily built up from US $1.1 billion in July 1991 to US $ 294 billion at the end of March 2012. The foreign exchange reserves of India include foreign currency assets held by RBI, gold holdings of RBI and special drawing rights or SDR’s.
  • FERA to FEMA: Foreign Exchange Regulation Act (FERA), which was set up to facilitate external trade ended up discouraging it. Thus, the Foreign Exchange Management Act (FEMA) was enacted to facilitate external trade and payment and promote the orderly development and maintenance of foreign exchange market in India.
  • Other measures: ‘Vishesh Krishi Upaj Yojana’ has been started to promote agricultural exports. Duty free Export Credit scheme has been revamped and recast into the ‘served from India’ scheme.

Test Your Skills Now!
Take a Quiz now
Reviewer Name