J. Bhagwati and A. Krueger defined a set of analytical phases in which exchange control
regime can be found. However 2 important things must be kept in mind -
1. It is not necessary that a country must pass through all the phases.
2. A country need not pass through the phases in the chronological sequence as
given by Bhagwati and Krueger.
• During this period reliance upon QRs to contain BoP deficit increases.
Phase II :
• In addition to QRs being intensified, various measures like heightened tariffs,
rebates for export, special tourist exchange rates, and other price interventions are
used to offset the undesired effects of the system.
Phase III :
• During this phase an attempt is made to systematize changes introduces in Phase I
• The phase starts with a formal exchange rate change accompanied by removal of
surcharges and other methods introduced in Phase II.
• Phase III being a tidying up operation, can result in country re-entering Phase II .
However reliance on QRs is reduced in which case country enters Phase IV.
• It was a period of good harvest along with equilibrium in the BoP (import demand
more or less equaled export earnings).
• This period coincided with the Second Five-Year Plan which laid emphasis on
heavy industrialisation and thus led to severe BoP crisis in 1957.
• Both the QRs and the industrial licensing were selective resulting in development
of certain industries only through import substitution.
• Foreign aid flows increased to 3% in 1960, which were less than 0.5% in pre-
1956 period.
• During this period export subsidization was introduced in 1962, though QRs on
imports initiated in 1957 continued. This was done to offset the penalties being
imposed on exports.
Adversely affected traditional exports and increased need for food imports.
• Towards the end of the period, Industrial licensing system was loosened.
• Also, later on, external large scale aid was resumed as well as access to short term
credit.
1966-1968 (Phase III) –
• It is in this period that first step towards liberalization took place in the form of
devaluation of Rupees by 57.5% along with elimination of export subsidies and
reduction of import duties.
• Political problems further gave rise to economic difficulties. Congress party led
by PM Indira Gandhi saw huge erosion of support . It did not help the Govt. that
external aid promised at the time of devaluation did not materialize.
1968-1975(Phase II) -
During the period, 1968-75, India was back in Phase II and this implied abandonment of
liberalization. It further led to:
Rise in import premium
Also, the country faced several exogenous shocks which are enumerated as follows:
1. The Bangladesh war in 1971 led to refugee inflows which created severe
economic pressures.
3. With the collapse of Bretton-Woods system, India linked rupee to pound in 1971
and to a basket of currencies in 1975. With depreciation of pound against dollar,
rupee depreciated mildly but devaluation was halted since rupee was linked to
basket of currencies.
• Import allocation criteria was subject to marginal conditions and became more
complex
1975-1985(Phase III) -
In contrast to the previous period,
• the foreign exchange availability improved dramatically and the net reserved of
foreign exchange also went up
• the pressure on BOP was reduced due to the reduction in public investment and
slow industrial growth
• the green revolution led to increases in the output of wheat and rice, increasing
the public foodgrain stock and reducing foodgrain imports
• The QR regime was relaxed and import allocation rules were made simpler.
However, Protective quotas to shield domestic industry from import competition
remained intact.
• The second oil shock in 1979 failed to make an impact on the QR regime because:
Mid-1991 to present -
The famous phase of 1991 saw a major policy change in the history of the Indian
economy. The reason for such drastic measures is as follows:
The foreign reserves weren’t enough to suffice for even three weeks of imports
It was then that the Rao-Singh reforms were introduced. The chief elements of the
reforms are:
Devaluation of rupee
The above mentioned reforms clearly indicate the arrival of Phase IV. If the full
convertibility of rupee on the current account is realized, the economy would be fully
liberalized.
The pre-1991 exchange control system divided the imports into 3 main
categories: consumer goods, capital goods and intermediate goods (such as raw
material, components etc). The import of consumer goods other than the ones
canalized and imported by state agencies (food grains, sugar etc) was not
permitted. The import of other goods was divided into the following licensing
categories: non-permissible, limited permissible, automatic permissible and
recently, OGL.
Conclusion
India’s development strategy was inward-oriented, and self-reliance was an
important objective which has resulted in a diversified industrial structure.
However, most of India’s industries are not internationally competitive in terms of
either cost per unit or product quality.
Indian planners did not view foreign trade as an engine of growth, they tried to
minimize import demand and viewed exports as a necessary evil mainly to
generate foreign exchange earnings to meet part of the import bill. However, to
achieve sustained, rapid, equitable and efficient growth, India must abandon it’s
inward oriented, capital intensive and inefficient development strategy.
The RAO SINGH reforms are vital steps towards a market based economy. These
reforms are based on understanding of what went wrong with Indian development
strategy.
Successful negotiations with labor unions in public and organized pvt. Sector
must be carried out for smooth transformation from job protection in inefficient
industry to seeking better jobs in a liberalized economy in which employment
opportunities are rapidly growing and plentiful.