Impact of Trade Liberalisation on Poverty Reduction in India

Volume-4, Issue-4, August-2014, ISSN No.: 2250-0758 International Journal of Engineering and Management Research Available at: www.ijemr.net Page Number: 372-376 Impact of Trade Liberalisation on Poverty Reduction in India Lokesh Kumar Assistant Professor, J.S.College Sikandrabad, Bulandshahr, INDIA I. ABSTRACT & INTRODUCTION After experimenting with a mixed economy model for more than four decades, India adopted wide ranging economic reforms measures in 1991 to liberalise investment and trade activities in the economy. The liberalisation process has continued in a steady manner since then. The economy has been substantially opened up as indicated by rise in share of merchandise trade from 14 percent of GDP in 1990-91 to 33 percent in 2005-06. The reform process has paid rich dividends in terms of GDP growth which has averaged above 6.5 percent per annum during the last one and a half decade. The economic reforms of the last two decades did bring positive results in terms of higher economic growth, expansion in exports, more disciplined crucial economic indicators such as fiscal deficit, inflation, and current account balance, which went haywire at the end of 1980s. The GDP growth in India rose from a rate of 3.5 percent that prevailed during the 1960s and 1970s to 5-6 percent in the 1980s and 1990s, touching an all-time high of 8.2 percent in 2003-04. GDP grew at an average annual rate of 7 percent in the 2000s compared with 5 percent in 1990s. India managed to recover though marginally its lost share in world trade, which was at whopping 2.5 percent of world merchandise exports in 1950, was much larger than the share of China and Japan. The share of India in world merchandise exports increased to 0.8 percent. The big question is how far did this new found higher growth regime translate in to poverty reduction and employment generation? The pace of employment growth slowed down in the 1990s. The population below poverty line declined in 1990s-both in absolute and percentage terms but it fell short of plan projections. Moreover the export-led growth did not leave much impact on the major states of poverty, viz Bihar, Uttar Pradesh, Assam and Orissa. This paper tries to investigate the impact of trade-led growth on poverty in India, based on secondary data and literature. The paper is organised as follows: Section 2 describes the Indian economic policy reforms of 1991 with focus on trade liberalisation, Section 3 presents the measures taken to liberalise agricultural trade, and Section4 examine the impact of trade-led growth on poverty alleviation. II. THE ECONOMIC POLICY REFORMS OF 1991 India s post-independence development strategy was one of national self-sufficiency, which stressed the importance of government regulation of the economy. In particular, India s trade regime was amongst the most restrictive in Asia, with high nominal tariffs and nontariff barriers, including a complex import licencing system an actual user policy that restricted imports by intermediaries, restrictions of certain exports and imports to the public sector, phased manufacturing programmes that mandated progressive import substitution, and government purchase preferences for domestic producers. The current account deficit rose to 3.2 percent of GDP in 1990, and debt-service payments amounted to as much as 35.3 percent of current foreign exchange receipts. Foreign exchange reserves were down to a level barely enough to finance imports for two and a half months. Short-term debts amounted to a dangerously high level of 146.5 percent of foreign exchange reserves by the end of March 1991. The rate of inflation soared exceeding 10 percent in 1990. Expectations of an imminent devaluation of the rupee led to the withdrawal of deposits by non-resident Indians. A spectre of default on short-term loans and a downgrading of India s credit rating loomed. The severity of the economic crisis of 1991 provided an opportunity for the government to undertake major macro-economic policy reforms of long standing restrictive domestic investment and international trade policies. India gradually abandoned the use of quantitative controls in economic management in favour of market based instruments. There was a decisive move away from inward orientation and toward greater integration with the global economy. Finally, the reforms signalled a shift away from an overstretched, overextended, rigid and inefficient public sector and toward greater reliance on the private sector (Srinivasan and Tendulkar, 2003). The pre 1991 trade and exchange rate regime protected domestic manufacturing industries through restrictive import policy. Prior to 1991, imports tariffs in India were amongst the highest in the world. The government export-import policy plan(1992-97) usheredin radical changes to the trade regime by sharply 372

reducing the role of the import and export control system. The share of products subject to QRs decreased from 87 percent in 1987-88 to 45 percent in 1994-95. The actual user condition on imports was discontinued. All 26 import-licensing lists were eliminated and a negative list was established (Hasan et al., 2003). Thus, apart from goods in negative list, all goods could be freely imported-subject to import tariffs (Goldar,2002). The maximum tariff rate was lowered from a peak of 355 percent in 1990-91 to around 40 percent by the year 1999-2000 and 9.5 percent up to 2009. The rate for the manufacturing sector was reduced to 30 percent in 1999-2000 from a high of around 125 percent before 1991 trade policy changes and this rate reduced up to 9 percent in 2009. The reductions in import duty rates were especially sharp for capital goods. There is an even lower rate of 20 percent applicable for machinery for electricity generation, petroleum refining, coal mining and zero for machinery for fertilizer projects. A number of changes were also made to simplify the system reduction in inter product variations and rationalisation of the tariff structure.agricultural products with the expansion of cereals and oil seeds, faced an equally sharp drop in tariffs though the NTBs of these products were lifted only in the late 1990s. There were some differences in the magnitude of tariff changes according to industry use type i.e. consumer durables, intermediate and basic goods. The Indian authority s first liberalised capital goods, basic and intermediate, while consumer non-durables and agricultural products were slowly moved from the negative list of freely importable goods only in the second half of the 1990s. III. AGRICULTURE TRADE LIBERALISATION During the last five decades there have been highly interventionist trade policies practiced by India which have discriminated against agriculture, particularly in the category of basic foods such as cereals. International trade in cereals by the private sector was practically banned during the period 1950-95, with the exception of Basmati rice exports and maize imports for the poultry sector. These restrictions on the external front were supplemented by substantial controls over pricing, stocking, marketing and transport of food grains at the domestic front. The major impetus towards agricultural sector liberalisation in India came after the establishment of the WTO in 1995. India is a founder member of the WTO. In order to fulfil its obligations under the WTO agreement on agriculture, India has undertaken several policy measures to reforms its farm sector. Source: EXIM Policy 1992-97, 1997-02 and 2004-09, GoI, New Delhi The main objectives of agro-food trade policy before the initiation of economic reforms in 1991 were import substitution and self-sufficiency. Agro-food imports and exports were strictly regulated. Trade policy for agriculture was highly protective and inward looking. The scenario witnessed significant changes after 1991, when India started economic reforms and adopted a new economic policy. The full expression of new trade measures was seen in the Export-Import policy announced on 31 March 1992. The EXIM Policy for 1992-97 was announced for five years instead of three, as in the past. The main features of the policy were that trade was free except for a small negative lists of imports and exports. Import of three items was banned, eighty items restricted and eight items canalised. These and various other changes in trade policy during 1991-2010 are presented in tables 1 and 2. 373

Source: EXIM policy 1992-97, 1997-2002 and 2004-09, GoI, New Delhi The three Exim policies launched since 1992 were distinct. The first policy (1992) aimed at import and export liberalisation. The second policy (1997) oriented towards globalisation. The third policy (2004) recognised, for the first time, the importance of trades as an instrument of growth. All policies related to agrofood are based on the premise that India has vast potential for export and emphasise the need to harness this potential. To actualise this various restrictions and controls on export of various agricultural items have been gradually removed, institutional and infrastructural support has been strengthened and some indirect incentives have been put in place. QRs on imports of agricultural products were phased out by April 2001 after WTO ruled that QR were not justified on balance of payment ground and recommended that India s import regime should confirm to its WTO obligations. The only agricultural item for which real liberalisation of import has taken place is vegetable oil. Its import could not be checked by even very high level of import duty. Impact of agricultural items is encouraged when domestic supply cannot match domestic demand,e.g. pulses and in case of temporary supply shocks, such as in case of cotton and sugar and earlier even in the case of wheat. There have been significant departures from the stated policy depending on developments in global and domestic economies. For instance, emphasis on export underwent significant changes after 2006-07, when global prices started increasing with the onset of the global food crisis. Following the crisis, India almost reserved some aspects of trade policy to insulate its domestic market from global food prices. It banned the export of main staples-rice and wheat (Table 1). The ban was relaxed after four years in 2011. During this period (2007-11), agricultural trade was strictly regulated by various notifications issued by the Directorate General of Foreign Trade. Source: Agricultural Statistics at a glance, GoI, New Delhi 374

Source: Agricultural Statistics at a glance, GoI, New Delhi The composition of agricultural export and import has undergone a significant change since 1991. These changes are shown in Table 3 for export and Table 4 for import. Since early 1990s, agricultural exports grew at annual compound growth rate close to 12 perecnt and imports have increased at the rate of 15.3 percent. Tea and Coffee, which were important traditional exports items from India, showed less than 4 percent growth which comprised almost one third of the growth in total agricultural exports. As a result, their shape in agricultural export fell down from 20.7 percent during 91-92 to 94-95 to 7 percent during 06-07 to 09-10. Cotton and Jute exports showed the highest growth among all major groups, closely followed by livestock products. India has also increased its sugar export by more than 10 times during the last two decades, though these exports are highly fluctuating. India is known for importing huge quantity of vegetable oil. Important initiatives were launched during late 1980s to reduce dependence on imported edible oil and attain selfsufficiency. Since early 1990s, the import of edible oil has increased from less than half a million tonne to close to 8 million tonne. In value terms, vegetable oil import increased from $106 million to $3.5 billion in recent years, thus registering an annual increase of 26 percent. The shape of food grains in export and import has increased. India has remained a net exporter of rice for a long time. However, it has remained at the margin of self-sufficiency in case of wheat-exporting and importing depending on fluctuations in domestic production. Pluses have emerged as an important import item in food grains. The shape of food grains has shown a significant increase in total exports and sharp decline in import. Foodgrains now constitute one fourth of agricultural imports and one fifth of agricultural exports, with a trade surplus of more than $1 billion. IV. TRADE LIBERALISATION- IMPACT ON POVERTY Economic liberalisation has an important role to play in elevating poverty and help the population at large to achieve a minimum standard of living within a reasonable period. This is expected to be achieved through higher growth rising through the purchasing power of the poor with the endowment of land and nonland assets and generate wide scale employment opportunities in the economy. The proportion of people living below the poverty line remained above 50 percent with no declining trend till the mid-1970s.it declined thereafter perceptively in the late 1970s and 1980s from 51 percent in 1977-78 to 39 percent in a 1987-88(Planning Commission). The intensity of poverty also declined considerably both in the rural and urban areas. During the 1990s slowdown in the rural employment growth and slowdown in the growth momentum of rural non-agriculture activities seem to have affected the pace in decline in rural poverty and aggravated rural-urban disparities. Almost 260 million Indians remained below the poverty line in 1999-2000. The widening rural urban poverty has coincided with widening inequality in the urban expenditure distribution. The 1990s growth benefited urban areas the most and aggravated the rural urban divide. Even with reduction in the poverty level, the absolute poverty level in India in income terms remained unacceptably large. Economic growth and improvement in real wages, particularly with growth with agriculture, which supports a considerable part of the population, has impacted upon the proportion of persons in poverty. Agriculture labour households, which accounted for 41 percent of rural poor in 1993-94, increased to 47 percent in 1999-2000. In contrast, the share of self-employed in agriculture among the rural poor drooped from 33 percent to 28 percent. The relative size of agriculture labour households among the poor has increased from 21 to 31 percent due to increased dependency of rural households on agriculture labour for livelihood as well as higher incidence of poverty among agriculture labour households 40 percent in 1999-2000 in contrast to 26 perecnt in all rural households. Casual labour households constituted 32 percent of urban poor in 1999-2000 increasing from 25 percent in 1993-94. The increase in its share was both due to increased dependency of urban households on urban casual labour market from 25 percent in 1993-94 to 32 percent in 1999-2000 as well as higher incidence of 375

poverty among the urban casual labour households (Planning Commission). The true benefits of trade liberalisation in agriculture cannot be realised unless it leaves a positive mark on social sectors. In the Indian case it is more important as a majority of the poor are dependent on agriculture for their subsistence. Ever since the Urguay Round AoA kick-started trade liberalisation in agriculture in 1995, there has been a considerable concern in India about its implications for more than 600 million people who are dependent on farming for their livelihood. This is particularly true for products like rice, cotton, wheat, and sugar, which are the lifeline of not only majority of rural people but also products like cotton Source: Planning Commission, Government of India and sugar provide employment to a significant proportion of the urban population as well. As of 1999-2000, India s poverty continues to be predominantly rural although rural poverty declined faster than urban poverty over the last 25 years. Moreover, the decline in national poverty seems to have been driven mostly by the decline in rural poverty, not surprising given that 74 percent of India s population lives in rural areas. The decline in poverty is remarkable during the period 1993-94 and 1999-2000 when the rural poverty went down by almost 10 percentage points in comparison to the seven percent fall in combined poverty ratio. But poverty is increased during the period 1999-2000 to 2004-05 (Table 5). India s achievements in the post-reform periods as far as economic performance is concerned are wideranging and clearly impressive. The recovery from 1991 crisis was exceptionally swift and the post-stabilisation period saw a significant acceleration in growth compared to the growth rate before the reforms. It also brought the stabilisation in the foreign exchange situation and restructuring of the economy so that the country could move to a higher growth path. However, experience of the reforms process in India has shown that it has not achieved its objective to an extent in reducing poverty in the country. In the post reform period (as compared between 45 th and 46 th rounds, just before the economic reforms compared with the rounds 52 and 53, the most recent post reform situation) there is almost no change in the pre and post poverty measures. Effective measures still need to be taken in the economy to trickle down the benefits of growth and development in different sectors of the economy to the poorest of the poor in the country. REFERENCES [1] Bhalla, G.S. (2004). Global and Indian Agriculture, State of the Indian Farmer, Vol.9, Ministry of Agriculture, GoI and Academic Foundation, New Delhi. Chand, R. (2002). Trade Liberalisation, WTO and Indian Agriculture : Experience and Prospects, Mittal Publications, New Delhi. [2] Chand, R. (2009). Global Food and Financial Crises: Experience and Prospective from India In: Agricultural Reforms and Trade Liberalisation in China and Selected Asian Countries: Lessons of Three Decades, Policy assistance Series 6, FAO, RAP Publications, Bankok.s [3] Goldar, B. (2002). Trade Liberalisation and Manufacturing Employment: The Case of India, Employment Paper No. 2002/34, International Labour Office, Geneva. [4] Government of India, (2000). Report of the Task Force on Agriculture, Ministry of Agriculture, India. Government of India, (2010). Economic Survey 2009-10, Ministry of Finance, New Delhi, India. [5] Government of India,(2011). Agricultural Statistics at A Glance 2011, Ministry of Agriculture, New Delhi, India. [6] Hasan, R., and K.V. Ramaswamy, (2003). Trade Reforms, Labor Regulations and Labor Demand Elasticities: Evidence from India, NBER Working Paper No. 9879. [7] Srinivasan, T.N. and S. Tendulkar, (2003). Reintegrating India with the World Economy, Institute for international Economics, Washington DC. Copyright 2011-14. Vandana Publications. All Rights Reserved. 376