Foreign Trade Policy: FTP-Structural Changes during 1990s

The Foreign Trade Policy (FTP) is a policy framework that defines the government’s strategy for promoting trade and investments in the country. The FTP of India underwent several structural changes during the 1990s, which were crucial for the economic development of the country. The major changes to trade policy in the post-1991 period are a simplification of procedures to promote free trade, removal of quantitative restrictions, a substantial reduction in the tariff rates, liberal inflows of private capital, a shift towards market-determined exchange rate, a focus on export growth, and entering into regional trade agreements. Some of the significant changes during this period are:

Liberalization of imports and exports:  The Government of India for the first time introduced the Indian Exim Policy on April I, 1992. To bring stability and continuity, the Export-Import Policy was made for 5 years. The FTP during the 1990s focused on the liberalization of trade policies to promote international trade. These reforms included reducing import tariffs, deregulating markets, and lowering taxes, which led to an increase in foreign investment and high economic growth.

Export-oriented policies: Before the 1991 economic liberalisation, India was a closed economy due to the average tariffs exceeding 200 percent and the extensive quantitative restrictions on imports. Foreign investment was strictly restricted to only allow Indian ownership of businesses. The EXIM policy (1992-97) gave a further push to liberalisation by freely allowing imports of all items except a negative list, decimalising a large number of raw materials, and further liberalising import of capital goods against export obligation: Import of all items including capital goods are freely allowed. The government introduced export-oriented policies to increase the competitiveness of Indian products in the global market. These policies provided several incentives and subsidies to exporters, such as duty-free imports of capital goods, tax exemptions, and reduced interest rates on export credits.

Foreign Investment:  The government also introduced policies to simplify the approval process for FDI and provide a more conducive environment for foreign investors. During the 1990s, India became one of the most dynamic Asian host countries for foreign direct investment (FDI), according to the United Nations Conference on Trade and Development’s (UNCTAD’s) World Investment Directory 2000:  During the decade, annual average FDI flows to India expanded more than six times, rising to $2.7 billion in 1995–98 and reaching a peak of $3.6 billion in 1997, from $470 million in 1991–94. FDI flows slowed once during the decade in 1998—the first time in 11 years—in the wake of that year’s financial crisis in Asia. India’s share in total flows to Asia and the Pacific during the period tripled to 3.3 percent from 1.1 percent, while the region’s share in world annual average flows decreased to 18 percent from 20 percent, the report says. Preliminary estimates for 1999 show that inflows have remained stable. (Source: IMF e-library).

Reduction of barriers and incentives for the promotion of exports: The government simplified the procedures for obtaining export licenses. India continues to maintain a large number of incentive programmes for export promotions. These include income tax exemptions, subsidized credit, export insurances, and guarantees, resulting in a boom in exports with total exports of goods and services going up from about USD 18 billion in 1991 to about USD 51 billion in 2002.

Exchange rate reforms: The Rupee was devalued in 1991 because of the large fiscal and current account deficits, dwindling international confidence in India’s economy, inflation, and consistent trade deficits. The government allowed the rupee to depreciate against the US dollar, which made Indian exports cheaper in the international market. India currently follows a market-determined exchange rate regime. This came into being in March 1993. This regime allows the market to determine the exchange rates. The International Monetary Fund (IMF) has revised India’s exchange rate regime, shifting it from a “floating” status to a “stabilised arrangement” for the period December 2022 to October 2023.

Special Economic Zones (SEZs): A Special Economic Zone (SEZ) is a specifically delineated duty-free enclave and shall be deemed to be foreign territory for trade operations, duties, and tariffs. The SEZs are entitled to duty-free import/domestic procurement of goods for the development, operation, and maintenance of SEZ units. They are exempted from Central Sales Tax, Service Tax, and State sales tax. These have now subsumed into GST and supplies to SEZs are zero rated under IGST Act, 2017. Other levies are exempted if exempted by the respective State Governments.

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