As we embarked on a period of planning after independence, import substitution constituted a major component of India’s trade and industrial policies. Planners, more or less, chose to ignore the option of foreign trade as a stimulant of economic growth. This was primarily due to the highly pessimistic view taken on the potential of export earnings.
The big change occurred in the early 1990’s as part of the liberalisation programme. Quantitative restrictions on imports were knocked down step-by-step. All import-licensing lists were eliminated and a “negative” list was established. Except consumer goods, almost all capital and intermediate goods could be freely imported subject to tariffs. Alongside, the import tariff rates were steadily brought down. According to one study, the weighted mean of tariff rates on manufactured products came down from 76.3 per cent in 1990 to 31.5 per cent in 2000 and by 2009, it is estimated to have come down to 8.3 per cent.
But after 2008,the three pillars of the external sector — remittances, exports and foreign direct investment — all shown steep declines in new fiscal year. This could have been bad news if the trend were to continue. Luckily, india bucked the trend due to macroeconomic stabilisation schemes of the then UPA Govt.
Prime Minister Modi however has turned the tide single handedly. His vision notwithstanding,India’s near-term prospects of the balance of payments are encouraging. Thanks to the substantial reduction in oil prices, India’s current account deficit will fall sharply this year as well as next year. The worrying factor is the sluggish growth in exports. Poverty alleviation being his mantra, Jan Dhan Yojana and other NDA led initiatives will definitely work the attain the UN Development Goals India has envisaged. For a country which had to loan from IMF now gives loans to the same, we have come a long way.
The medium-term compulsions are very clear. While availability of capital flows may not be the binding constraint, we need to work towards a much lower current account deficit than we had seen in recent years. We must also be prepared for the day when oil prices begin to rise.
My view is that India need not worry as of now,Mr Modi is a leader par excellence. He can guide us in the toughest of macroeconomic scenarios India can fathom.