A neglected story

Unilateral, multilateral and regional trade liberalisation strands have all played a role in the abolition of import licensing in India

For 30 years up to 1990 we used to operate a hideously complex system of quantitative restrictions (QRs) on imports, run by the Ministry of Commerce and the Customs administrations. Anyone remember the massive Export-Import Policy handbooks? Nearly all imports were under licensing, with the broad categories being: “Prohibited”, “Restricted”, “Limited Permissible”, “Canalized”, and “Open General License (OGL)”. Prohibited meant just that and Restricted was usually very restricted, bordering on prohibited. OGL did not always mean free of import restrictions: Sometimes they were “free” for “actual users” only; traders could not import them. Some Restricted and Limited Permissible items could be imported against “Special Import Licenses” (SILs), which were linked to export earnings. 

The procedures for allocating import licenses were also complex and opaque and would take me many pages to describe. Relax dear reader, I won’t even try. In the mid-1980s, as freshly recruited Economic Advisers to the Department of Economic Affairs in the Finance Ministry, Prannoy Roy and I sometimes attended the fortnightly Import Policy Committee meetings chaired by the Chief Controller of Imports and Exports. When we understood the issues of particular cases, we tried (with modest success) to argue in favour of liberalisation. Mostly, we were flummoxed by the proceedings, which may have contributed to Prannoy’s early departure from government service to found NDTV and go on to change the face of Indian television!

This system of tight and complex QRs on imports, together with the prevailing structure of steep and multi-rate customs tariffs, conferred high, differentiated, opaque and uncertain protection across virtually the entire domain of tradable products. The economic consequences for the development of foreign trade and efficient domestic industry were hugely negative. All this changed from 1991 onwards. However, while the post-1991 evolution of customs tariffs and exchange rates has been described often, it is hard to find good accounts of what happened to the QR policy regime. For example, in a recent review “Trade Policy Reform in India since 1991” in India Transformed: 25 Years of Economic Reforms (edited by Rakesh Mohan), Harsha Vardhana Singh provides a detailed analysis of the trajectory of customs tariffs but devotes only a page and a half to QRs and import licensing in his 50-page paper. But there is a story to be told. Here is a summary account.

Under the rules of the post World War 2 General Agreement on Tariffs and Trade (GATT), QRs were disallowed, except temporarily under situations of extreme balance of payments (BoP) pressure. This was under Article XVIIIB and was referred to as “BoP cover”. Following the foreign exchange crisis of the late 1950s our government resorted to pervasive QRs to manage the BoP. Temporarily of course, except that we extended the notion of temporary to span several decades! I recall several trips to Geneva, with successive Commerce Secretaries, in the late 1980s and early 1990s to defend our recourse to QRs before the relevant GATT committee. It was tough going, especially as we were fully aware that, over time, our QR regime had evolved to also become a potent instrument for protection of domestic industries.

 Fortunately, in the initial burst of trade policy liberalisation in the early 1990s, QRs on imports of raw materials, intermediates and capital goods were eliminated and the results codified in the landmark Export Import Policy of 1992. This meant that about 60 per cent of tariff lines (at the 10-digit level of the Harmonized System of trade classification) became free of QRs and licensing. The great bulk of the remainder were consumer goods on which the policy decision was deferred, partly on technocratic grounds of phasing reforms and, importantly, to reflect a politico-administrative bias against imported consumer goods. Over time, the latter factor became dominant, buttressed by domestic interests which benefited from the protection conferred by the QRs. Thus, the proportion of tariff lines free from QRs was still stuck at 61 per cent in 1996 (see table).

However, following the dramatic improvement of our BoP position after 1993, as a result of the trade and exchange rate reforms of the early 1990s, our interlocutors in GATT (namely other member nations) became increasingly impatient with our continued recourse to BoP cover under article XVIIIB. Under growing pressure from major trading partners, led by the US, we offered a six-year phase out of our BoP-justified QRs (preponderantly on consumer goods) beginning 1997. While our other major trading partners agreed, the US didn’t and “took us to court” under the World Trade Organization’s (WTO’s) dispute settlement procedure. We lost and had to eliminate QRs by April 2001. Consequently, in the two years between 1998 and 2000, the share of Restricted, Canalized and SIL tariff lines fell from 33 per cent to 12 per cent, while the share of free imports climbed to 87 per cent. By 2001 over 95 per cent of our tariff lines were free of QRs and we had duly met our WTO obligations. Restrictions remained on a number of items for reasons of health, safety, environment and culture/morality.

In the final years of QR elimination, there were apprehensions about surges in consumer good imports and a “war room” had been established in the commerce ministry to monitor such eventualities. In the event such apprehensions proved exaggerated: There was no dreaded surge in consumer good imports; the market-determined exchange rate and prevailing customs tariffs did their work.

Actually, there had been something of a dress rehearsal to the elimination of QRs on consumer goods under WTO decision. In the 10th SAARC (South Asian Association for Regional Cooperation) summit of 1998, held in Colombo, Prime Minister Atal Bihari Vajpayee announced the removal of QRs maintained on BoP grounds for imports from  member countries of the SAARC Preferential Trading Arrangement (SAPTA), with effect from August 1998 and subject to SAPTA rules of origin. Then too there was no surge in imports.

An interesting feature of this story of liberalisation of India’s imports from licensing restrictions is the manner in which unilateral, multilateral and regional trade liberalisation strands have all played a role at different times in different ways.

The writer is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views are personal