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Indian Economy

Notes It was since 1991 that radical changes and reforms were launched in the EXIM policy. There has
been stable curtailment of import tariffs and liberalisation of quantitative restrictions. The
rupee has been made nearly fully convertible on the current account.

14.1.1 New Trade Policy (1991)

You must understand that the new policy substantially removes licensing, quantitative
restrictions, and other regulatory and discretionary controls. The chief characteristics of the new
trade policy are:
1. Free Import and Export: The new trade policy made main alternatives in the import
licensing system by substituting a large portion of administered licensing of imports by
import entitlements connected to export earnings. The system of advance license, designed
to offer exporters with duty free access to inputs, was reinforced further by simplifying
and speeding up the process of granting these licenses.
The procedure of import of capital goods was simplified pursuing the Industrial Policy of
1991. New units and units undergoing considerable expansion would be automatically
granted licenses for import of capital goods without any clearance from the indigenous
availability angle, offered their import is entirely covered by foreign equity or the import
requirement was till 25% of the worth of plant and machinery subject to a maximum of
` 2 crore.

Import of OGL capital goods, non-OGL capital goods and limited goods would be permitted
without a particular license, provided clearance was provided by the RBI and foreign
exchange, as their imports are fully covered by foreign equity.

2. Rationalisation of Tariff Structure: On the suggestion of Chelliah Committee, import
duty was drastically decreased to set parity in prices of goods produced domestically and
internationally. The 1993-94 Budget decreased the maximum rate of duty on all goods
from 110% to 85%, except for few goods, which was additionally decreased to 40% in 1998-
99 and further to 35% in 2000-01.
3. Decanalisation: The latest trade policy targeted at progressive decanalisation. The
government decontrolled 116 items permitting their exports without any licensing
formalities. Another 29 items were moved to OGL. It also decanalised 16 export items and
20 import items involving new print, non-ferrous metals, natural rubber, intermediate
and raw material for fertilizers. But, eight items (petroleum products, fertilisers, etc.)
stayed canalised.
4. Exchange Rate Reforms: The government devalued the rupee in July 1991, which resulted
in depreciation in the value of the rupee against the five main international currencies by
approximately 22%. It also made the rupee convertible:

(i) Partial Convertibility of Rupee: In the Budget of 1992-93, the then finance minister
declared Liberalised Exchanged Rate Management Systems (LERMS) under which
40% of the foreign exchange receipts were to be exchanged via the RBI at the official
exchange rate and remaining was permitted to be converted at market exchange
rate. The official exchange rate was lesser than the market exchange rate.
(ii) Fully Convertible on Current Account: The rupee was made entirely convertible. Current
account convertibility depicts the freedom to purchase or sell foreign exchange for
the following international transactions: (a) all payment due in relation with foreign
trade, recent business, and usual short-term banking and credit amenities,
(b) payment due as interest on loans and as net income from other investments,
(c) payments of moderate quantity of amortisation of loans or for depreciation of
direct investment, as well as (d) moderate remittances for family living expenses.

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