Subroto Roy must ask Dr Manmohan Singh’s Government how it sees India’s “aam admi” coming to benefit by the United States Polo Team welcoming India in 2010 in the world championship polo matches on the DC National Mall, as has been very kindly reported by Mr and Mrs Tareq Salahi following the “Sensational Night honoring India”.
Subroto Roy is afraid he does not think the interests of the common man and woman of India come to be served in the slightest by a fancy dinner-party whether given by the Queen of England at Buckingham Palace for the President of India or by the President of the United States at the White House for the Prime Minister of India….(…though some businessmen and bureaucrats become happy…)
Citizen & Voter
“*Ministry of Personnel, Public Grievances and Pensions* * *THE INDIAN ADMINISTRATIVE SERVICES (PROBATIONERS’ FINAL EXAMINATION) REGULATIONS, 1955* * *In pursuance of rule 7 of the Indian Administrative Service (Probation) Rules, 1954, the Central Government, in consultation with the State Governments and the Union Public Service Commission, hereby makes the following regulations, namely* *1. Short title:- These regulations may be called the Indian Administrative Service (Probationers’ Final Examination) Regulations, 1955.* *2. Definition:- 2(1) In these regulations, unless the context otherwise requires,-* *(a) `Academay’ (sic) means Lal Bahadur Shastri National Academy of Administration;* *(b) [ ];* *(c) `Director’ means the Director of the Academy; and * *(d) `Schedule’ means a Schedule appended to these regulations.* *2(2) All other words and expressions used in these regulations and not defined shall have the meanings respectively assigned to them in the Indian Administrative Service (Probation) Rules, 1954.* *3. Final examination.- 3(1) Every probationer shall, at or about the end of the period of training in the Academy appear at a final examination.* *3(2) The examination shall be conducted by the 4Director in the manner laid down in these regulations….4. PUBLIC ADMINSTRATION AND MANAGEMENT* *Essentials of Administration-Organisational Structure of Governments, Role of Civil Servants, Administrative Ethics and Accountability, Delegation and Decentralisation-District and Local Administration-Personal Administration, Police Administration-Jail Administration Panchayati Raj Administration- CalamityAdministration-Administration of Development and Welfare Programmes- Budget and Role of Audit and general financial principles-Role of District Officer/SDO-Conduct of Elections.* *Management and Organisation* *Behavioural Science Motivation, Leadership, Decision-Making, MBO, Management of Conflicts, Management of Change ,Transactional Analysis, -MIS-O&M & Work study-Pert-CPM, Time Management Methodology of Presentation of a subject-Financial Management Capital Budgeting, Discountal Cash Flow, Ratio Analysis, Project Formulation, Cost benefit Analysis, Project Evaluation Interpretation of Balance Sheets….” (emphasis added)
OUR ENERGY INTERESTS
First published in The Sunday Statesman, August 27 2006, The Statesman August 28 2006, Editorial Page Special Article, www.thestatesman.net
Americans are shrewd and practical people in commercial matters, and expect the same of people they do business with. Caveat emptor, “let the buyer beware”, is the motto they expect those on the other side of the table to be using. Let us not think they are doing us favours in the nuclear deal ~ they are grown-ups looking after their interests and naturally expect we shall look after our own and not expect charity while doing business. Equally, let us not blame the Americans if we find in later years (long after Manmohan Singh and Montek Ahluwalia have exited from India’s stage) that the deal has been implemented in a bad way for our masses of ordinary people.
That said, there is a remarkable disjoint between India’s national energy interests (nuclear interests in particular), and the manner in which the nuclear deal is being perceived and taken to implementation by the two sides. There may be a fundamental gap between the genuine positive benefits the Government of India says the deal contains, and the motivations American businessmen and through them Indian businessmen have had for lobbying American and Indian politicians to support it. An atmosphere of being at cross-purposes has been created, where for example Manmohan Singh is giving answers to questions different from the questions we may want to be asking Montek Ahluwalia. The fundamental gap between what is being said by our Government and what may be intended by the businessmen is something anyone can grasp, though first we shall need some elementary facts.
In 2004, the International Energy Agency estimated the new energy capacity required by rising economic growth in 2020 will derive 1400 GW from burning coal (half of it in China and India), 470 GW from burning oil, 430GW from hydro, and 400 GW from renewable sources like solar or wind power. Because gas prices are expected to remain low worldwide, construction of new nuclear reactors for electricity will be unprofitable. By 2030, new energy expected to be required worldwide is 4700GW, of which only 150GW is expected from new nuclear plants, which will be in any case replacing existing plants due to be retired. Rational choice between different energy sources depends on costs determined by history and geography. Out of some 441 civilian reactors worldwide, France has 59 and these generate 78 per cent of its electricity, the rest coming from hydro. Japan has 54 reactors, generating 34% of its electricity from them. The USA has 104 reactors but generates only 20 per cent of its electricity from them, given its vast alternative sources of power like hydro. In India as of 2003, installed power generating capacity was 107,533.3MW, of which 71 per cent came from burning fuels. Among India’s energy sources, the largest growth-potential is hydroelectric, which does not involve burning fuels ~ gravity moves water from the mountains to the oceans, and this force is harnessed for generation. Our hydro potential, mostly in the North and North-East, is some 150,000MW but our total installed hydro capacity with utilities was only 26,910MW (about 18 per cent of potential). Our 14 civilian nuclear reactors produced merely 4 per cent or less of the electricity being consumed in the country. Those 14 plants will come under “international safeguards” by 2014 under the nuclear deal.
It is extremely likely the international restrictions our existing nuclear plants have been under since the 1970s have hindered if not crippled their functioning and efficiency. At the same time, the restrictions may have caused us to be innovative too. Nuclear power arises from fission of radioactive uranium, plutonium or thorium. India has some 8 million tonnes of monazite deposits along the seacoast of which half may be mined, to yield 225,000 tonnes of thorium metal; we have one innovatively designed thorium reactor under construction. Almost all nuclear energy worldwide today arises from uranium of which there are practically unlimited reserves. Fission of a uranium atom produces 10 million times the energy produced by combustion of an atom of carbon from coal. Gas and fossil fuels may be cheap and in plentiful supply worldwide for generations to come but potential for cheap nuclear energy seems practically infinite. The uranium in seawater can satisfy mankind’s total electricity needs for 7 million years. There is more energy in the uranium impurity present in coal than can arise from actually burning the coal. There is plenty of uranium in granite. None of these become profitable for centuries because there is so much cheap uranium extractable from conventional ores. Design improvements in reactors will also improve productivity; e.g. “fast breeder” reactors “breed” more fissile material than they use, and may get 100 times as much energy from a kilogram of uranium as existing reactors do. India has about 95,000 tonnes of uranium metal that may be mined to yield about 61,000 tonnes net for power generation. Natural uranium is 99.3 per cent of the U-238 isotope and 0.7 per cent of the radioactive U-235 isotope. Nuclear power generation requires “enriched uranium” or “yellow cake” to be created in which U-235 has been increased from 0.7 per cent to 4 to 5 percent. (Nuclear bombs require highly enriched uranium with more than 90 per cent of U-235.) Yellow cake is broken into small pieces, put in metal rods placed in bundles, which are then bombarded by neutrons causing fission. In a reactor, the energy released turns water into steam, which moves turbines generating electricity. While there is no carbon dioxide “waste” as in burning fossil fuels, the “spent” rods of nuclear fuel and other products constitute grave radioactive waste, almost impossible to dispose of.
The plausible part of the Government of India’s official line on the Indo-US nuclear deal is that removing the international restrictions will ~ through importation of new technologies, inputs, fuel etc ~ improve functioning of our 14 existing civilian plants. That is a good thing. Essentially, the price being paid for that improvement is our willingness to commit that those 14 plants will not be used for military purposes. Fair enough: even if we might become less innovative as a result, the overall efficiency gains as a result of the deal will add something to India’s productivity. However, those purchasing decisions involved in enhancing India’s efficiency gains must be made by the Government’s nuclear scientists on technical grounds of improving the working of our existing nuclear infrastructure.
It is a different animal altogether to be purchasing new nuclear reactors on a turn-key basis from American or any other foreign businessmen in a purported attempt to improve India’s “energy security”. (Lalu Yadav has requested a new reactor for Bihar, plus of course Delhi will want one, etc.) The central question over such massive foreign purchases would no longer be the technical one of using the Indo-US deal to improve efficiency or productivity of our existing nuclear infrastructure. Instead it would become a question of calculating social costs and benefits of our investing in nuclear power relative to other sources like hydroelectric power. Even if all other sources of electricity remained constant, and our civilian nuclear capacity alone was made to grow by 100 per cent under the Manmohan-Montek deal-making, that would mean less than 8% of total Indian electricity produced.
This is where the oddities arise and a disjoint becomes apparent between what the Government of India is saying and what American and Indian businessmen have been doing. A “US-India Business Council” has existed for thirty years in Washington as “the premier business advocacy organization promoting US commercial interests in India.… the voice of the American private sector investing in India”. Before the nuclear or any other deals could be contemplated with American business, the USIBC insisted we pay up for Dabhol contracted by a previous Congress Government. The Maharashtra State Electricity Board ~ or rather, its sovereign guarantor the Government of India ~ duly paid out at least $140-$160 million each to General Electric and Bechtel Corporations in “an amicable settlement” of the Dabhol affair. Afterwards, General Electric’s CEO for India was kind enough to say “India is an important country to GE’s global growth. We look forward to working with our partners, customers, and State and Central Governments in helping India continue to develop into a leading world economy”.
Also, a new “US-India CEO Forum” then came about. For two Governments to sponsor private business via such a Forum was “unprecedented”, as noted by Washington’s press during Manmohan Singh’s visit in July 2005. America’s foreign ministry announced it saying: “Both our governments have agreed that we should create a high-level private sector forum to exchange business community views on key economic priorities…” The American side includes heads of AES Corporation, Cargill Inc., Citigroup, JP Morgan Chase, Honeywell, McGraw-Hill, Parsons Brinckerhoff Ltd, PepsiCo, Visa International and Xerox Corporation. The Indian side includes heads of Tata Group, Apollo Hospitals Group, Bharat Forge Ltd, Biocon India Group, HDFC, ICICI One Source, Infosys, ITC Ltd, Max India Group and Reliance Industries. Presiding over the Indian side has been Montek Ahluwalia, Manmohan’s trusted aide ~ and let it be remembered too that the Ahluwalias were Manmohan’s strongest backers in his failed South Delhi Lok Sabha bid. (Indeed it is not clear if the Ahluwalias have been US or Indian residents in recent years, and if it is the former, the onus is on them to clear any perception of conflict of interest arising in regard to roles regarding the nuclear deal or any other official Indo-US business.)
Also, before the Manmohan visit, the Confederation of Indian Industry registered as an official lobbyist in Washington, and went about spending half a million dollars lobbying American politicians for the nuclear deal. After the Manmohan visit, the US Foreign Commercial Service reportedly said American engineering firms, equipment suppliers and contractors faced a $1,000 billion (1 bn =100 crore) opportunity in India. Before President Bush’s visit to India in March 2006, Manmohan Singh signed vast purchases of commercial aircraft from Boeing and Airbus, as well as large weapons’ deals with France and Russia. After the Bush visit, the US Chamber of Commerce said the nuclear deal can cause $100 billion worth of new American business in India’s energy-sector alone. What is going on?
Finally, the main aspect of Manmohan Singh’s address to America’s legislature had to do with agreeing with President Bush “to enhance Indo-US cooperation in the field of civilian nuclear technology”. What precisely does this mean? If it means the Indo-US nuclear deal will help India improve or maintain its existing nuclear infrastructure, well and good. There may be legitimate business for American and other foreign companies in that cause, which also helps India make the efficiency and productivity gains mentioned. Or has the real motivation for the American businessmen driving the deal (with the help of the “CEO Forum” etc) been to sell India nuclear reactors on a turn-key basis (in collaboration with private Indian businessmen) at a time when building new nuclear reactors is unprofitable elsewhere in the world because of low gas prices? India’s citizens may demand to know from the Government whether the Manmohan-Montek deal-making is going to cause importation of new nuclear reactors, and if so, why such an expensive alternative is being considered (relative to e.g. India’s abundant hydroelectric potential) when it will have scant effect in satisfying the country’s energy needs and lead merely to a worsening of our macroeconomic problems. Both Manmohan Singh and Montek Ahluwalia have been already among those to preside over the growth of India’s macroeconomic problems through the 1980s and 1990s.
Lastly, an irrelevant distraction should be gotten out of the way. Are we a “nuclear weapons” state? Of course we are, but does it matter to anything but our vanity? Ronald Reagan and Mikhail Sergeyevich Gorbachev had control over vastly more nuclear weapons and they declared together twenty years ago: “A nuclear war cannot be won and must not be fought”, which is how the Cold War started to come to an end. We need to remind ourselves that India and Pakistan are large, populous countries with hundreds of millions of materially poor, ill-informed citizens, weak tax-bases, humongous internal and external public debts (i.e. debt owed by the Government to domestic and foreign creditors), non-investment grade credit- ratings in world financial markets, massive annual fiscal deficits, inconvertible currencies, nationalized banks, and runaway printing of paper-money. Discussing nuclear or other weapon-systems to attack one other with is mostly a pastime of our cowardly, irresponsible and yes, corrupt, elites.
Author’s Note July 2007: This was a study done by me 14 years ago when I was an economic consultant in Washington DC, USA. It emerged from but was independent of the work on India’s exports and exchange-rates I had done as a consultant at the International Monetary Fund. It has not been published before though a few pages were published in an ICRIER study in 1994.
An Economic Assessment of India-United States Merchandise Trade
by Subroto Roy1]/
The aim of this study will be to give an economic assessment of the long-run trends in merchandise trade between the United States and India over the period 1962-1992.
Two basic facts have governed the long-run path and pattern of India-United States merchandise trade. One has to do with the relative decline and growth of the Indian and American economies respectively since the Second World War. The other has to do with the trade-regimes which have prevailed in each country.
On the American side, the market-based principles which are supposed to govern the United States economy have been in practice egregiously compromised by American protectionism of the domestic textiles and clothing industries — key sectors in which India and other countries of the subcontinent have held some traditional comparative advantage as exporters in the world economy. On the Indian side, the Indian economy has been egregiously distorted for decades by what can be characterized only as failed economic policies ever since the Second Five Year Plan.
Sections 2-4 briefly describe aspects of this historical and institutional background to the merchandise transactions between the two countries. Section 2 indicates the asymmetry which has come about in the relative positions of India and the United States in the world economy. Section 3 outlines the main features of American protectionism with respect to textiles and clothing. Section 4 outlines the main distortions of the trade and payments regime which has prevailed in India with respect to exports from the United States and other countries.
Sections 5 and 6 then examine the major trends in American imports from India and the major trends in Indian imports from the United States respectively. Section 7 summarizes the findings and raises some questions for policy-discussion.
Tables in the text and the Appendix give the data supporting the thesis of the study. Table 2.1. indicates the local and global sizes of the Indian and other subcontinental economies. Tables 5.1 and 5.2, reproduced from Safadi & Yeats (1993), describe the destination of the subcontinent’s exports and product composition to North America specifically. Table 5.3. describes the nominal and real changes in major Indian exports to the USA from 1962-1991. Table 5.4 and Chart 5.1. describe the changing market-share of India and Pakistan in certain key import-markets in the USA and Britain between 1962-1991. Table 5.5. indicates real growth of the subcontinent’s exports of clothing to major industrial countries in recent years. Tables 6.1-6.3 describe the major trends in American exports to India between 1962-1991 at current prices, while Table 6.4. describes the nominal and real changes in major American exports to India during the period.
Finally, for purposes of future research, Tables A.1 and A.2 in the Appendix give detailed United States Commerce Department data of all India-United States merchandise trade in the current period 1989-1992./
2. Relative Decline and Growth
Since the Second World War, India has drastically declined from moderate to insignificant size as a trading power in the world economy, while the United States has grown to become the predominant national economy in world trade and payments.
India’s precipitous decline can be indicated by a few examples.
In the era 1757-1947 “India was unquestionably one of the great trading nations of Asia”/, indeed of the world economy as a whole. While precise calculations cannot be made of the costs and benefits of British influence in India during this time, it is clear that the Indian economy both gained from British activity in promoting new products, manufactures, investment and infrastructure in the country, as well as lost from iniquitous commercial policies, taxation and imperial charges imposed by the British Government.
Britain was the world’s largest economy and India is reported to have been the single largest destination of British exports./ Germany, the world’s fastest growing economy, received as much as 5 percent of its total imports from India in 1913, and sent 1.5 percent of its exports to India, making India the sixth largest exporter to Germany (after the USA, Russia, Britain, Austria-Hungary and France) and the eighth largest importer from it (after Britain, Austria-Hungary, Russia, France, the USA, Belgium and Italy.)/ Throughout this era, the Indian economy generally showed an export surplus on merchandise account, and an excess demand only for precious metals on capital account.
India’s share of world exports were an estimated 2.5 per cent in 1867/68, 3.4 percent in 1880, 4.1 percent in 1890, 3.7 percent in 1897 and 4 per cent in 1913./ As late as the mid-1950s, just before the onset of the Government of India’s Second Five Year Plan, India could have been still considered a significant trading power with a share of 2 percent of world exports and a rank of 16 in the world economy (following the USA, Britain, West Germany, France, Canada, Belgium, Holland, Japan, Italy, Australia, Sweden, Venezuela, Brazil, Malaya and Switzerland)./
Today the combined shares of India and all other countries of the subcontinent together amount to about 0.8 of 1 percent of world exports, India’s share being 0.54 of 1 percent. As can be seen from Table 2.1, the subcontinent accounts for just 6 percent of Asia’s total exports to the world, of which the Indian economy accounts for about two thirds. By way of comparison, Malaysia on its own accounts for 6.5 percent of Asia’s total exports and almost 0.9 of 1 percent of world exports. More poignant perhaps has been India’s loss of share of manufactured exports relative to other developing countries. Of 11 major developing countries (including Korea, Taiwan, Singapore, Hong Kong, Argentina, Brazil, Chile, Mexico, Israel and Yugoslavia), India’s share of the total manufactured exports of these countries fell from a dominant 65 percent in 1953 to 51 percent in 1960 to 31 percent in 1966 to 10 percent by 1973./
Other indicators of India’s loss of export competitiveness appear in the decline of traditional exports like textile manufactures and tea. India’s textile manufactures were legendary for centuries but have lost ground steadily. As late as 1962-1971, India held an average annual market-share of almost 20 percent of all manufactured textile imports into the United States. This fell to 10 percent in 1972-1981 and to less than 5 percent in 1982-1991. India’s share of Britain’s imports of textile manufactures has fallen from 16 percent in the early 1960s to less than 4 percent in the 1990s. This decline has been due in part to American and European protectionism of domestic textiles, and in part to Indian economic trade and exchange-rate policies.
In case of tea, India and Sri Lanka once dominated world exports but have both lost competitiveness rapidly to other exporting countries, especially Kenya, Indonesia and Malawi. Sri Lanka’s market-share of total British tea imports fell from 11 percent in 1980 to 7 percent in 1991 while India’s share of the same market has fallen even more drastically from 33 percent in 1980 to 17 percent in 1991.
Altogether, India, with the world’s second largest population, has now become the 31st largest exporting country in the world economy. Total Indian exports of $18 billion in 1990 were lower in absolute terms than the exports of China and every newly industrializing country in East and South East Asia; Brazil, Venezuela, South Africa, Saudi Arabia, and every country in West Europe and North America except Portugal, Greece and Iceland./ In proportion to India’s great size, the ranking would be far more adverse.
The basic asymmetry in analyzing India-United States trade is indicated by the fact that during the same period as India’s precipitous decline, the United States has grown to become the single largest national economy in the world.
The shares of the United States (and Britain respectively) in world exports were 12 percent (20 percent) in 1880; 14 percent (16 percent) in 1900; 13 percent (15 percent) in 1913; and 12 percent (18 percent) in 1937./ After the Second World War and the decline of the British economy, the United States unambiguously became the world’s predominant national economy. The United States was the keystone of the international monetary system following the Bretton Woods Conference in December 1945. At the same time, American exports accounted for as much as 20 percent of world exports in the 1950s, decreasing to 12 percent by the 1990s following the recoveries of Germany and Japan and the high performances of some East and South East Asian economies./
The growing asymmetry in the positions of India and the United States as exporting economies may be summarized by their respective shares in world exports. The ratio of India’s share in world exports to the U. S. share of world exports was 1:3 as of 1913, which became 1:10 as of 1955, and has become 1:24 as of 1990. Such an asymmetry may be expected to be an implicit factor explaining the course of bilateral economic discussions between the Governments of the two countries, as well as transactions between private parties.
3. American Protectionism in Textiles and Clothing
The second basic fact governing the path and pattern of India-United States trade has had to do with the administration of economic policy in each country.
According to the market-based principles which are supposed to govern the United States economy, American demand for Indian imports would have been driven solely by private sector demand conditions in the U. S. economy. The United States Government would not have been expected to intervene in limiting the value of the potential contracts made between private American importers and private Indian exporters. The main factors affecting American demand-decisions for Indian exports would then have been identified as relative costs, and the preferences and income-levels of American consumers.
That is, by textbook economic principles, the main factors affecting demand-decisions regarding American imports from India would have been identified as:
(a) the cost and quality of an Indian product relative to similar products from alternative suppliers including domestic producers;
(b) the exchange-rate of the Indian rupee with respect to the United States dollar;
(c) the macroeconomic condition of the United States economy.
In practice, volume restrictions imposed by the United States Government to protect domestic producers have been critical factors determining the pattern of exports from India and other developing countries to the United States. This has hit hardest via the so-called “Multi-Fibre Arrangement” (MFA) affecting textiles and clothing, the two key export sectors of India and other countries in the subcontinent.
The roots of this aspect of American protectionism are to be found in the early 1960s, in what was supposed to be a temporary short-term measure to protect the United States textile and clothing industry. Instead of imposing global protective quotas under the GATT with respect to all textile and clothing exporters, the United States (and European Community) chose to discriminate in a country-specific manner against imports of particular products from particular countries. A possible explanation of why global quotas were not used is that while the United States (and Europe) did not want to invite trade conflicts with major trading partners, no similar reluctance was called for with respect to smaller trading partners in the developing world.
Exporters like India and the other countries of subcontinent have had little alternative but “sheer capitulation to far stronger parties in world trade”/. The MFA as administered in practice by importing countries has been so complicated and lacking in transparency that it has made “precise identification of the ex ante effective quotas virtually impossible”./ Divisiveness among the exporting countries has been inevitable, as each exporter has effectively faced in bilateral negotiations something like a large discriminating monopsonist.
The distortions caused by the MFA have been well-recorded as follows:
“The most efficient suppliers always make best use of the prevailing market conditions. The irony of discriminatory protectionism [like the MFA restrictions] is that good performance is punished. When a supplier shows a potential in a market, its most promising products are covered by quotas. Emerging suppliers usually start with a low coverage ratio and utilization rate… If they perform as expected, they soon hit the quota ceilings in those limited goods. They can move into new products, although these will also become subject to restrictions. Growth of quota ceilings do not catch up with the expansion of successful suppliers’ shipments, and product diversification is more than compensated by imposition of restrictions on the merging products. The moral of the story is that it is not only the exporters of the established suppliers who come under binding constraints. The newcomers, who might to some extent benefit from restrictions on the major suppliers, so find themselves pressed; the more successful they are, the faster and tighter they are embraced by the MFA.”/
From the point of view of reforming the system, what may be more significant is that protective volume restrictions imposed by the MFA damage economic efficiency and welfare in the importing country.
The domestic United States textile industry produces very high quality goods, and has the advantage of close integration with domestic sources of raw materials and the domestic market. Free competition with foreign imports would have reduced costs and achieved even higher standards of quality for the benefit of the American consumer. Restrictions on foreign imports in the form of selective quotas have effectively reduced competition and tended to lower quality and raise costs for the American consumer./
In short, although the ultimate sources of demand-decisions for Indian products are private businesses and households in the United States economy, the protection of textiles and clothing has transferred potential benefits from the American consumer in the direction of powerful domestic producer lobbies, and in the process reduced the potential value of imports from India and other countries to the American market.
4. Distortions of India’s Trade and Payments
On the Indian side, Indian demands for the world’s exports have been, until the 1990s, completely determined by the centralized economic regime of the Government, which made only indirect reference to the Indian public. Until the start of the current reforms in 1991, Indian commercial and exchange-rate policy was fundamentally based on the official confiscation of foreign exchange earnings of export and hard currency earning sectors, official licensing of imports, and rationing of foreign exchange disbursements according to official priorities.
The roots of this system are to be found in the import quotas imposed on the Indian economy by the British Government in 1940 to conserve foreign exchange and save shipping space on behalf of Britain’s effort in the Second World War, while control of hard currency expenditures were implemented over the whole Sterling Area. All imports were under direct quantitative control by 1942 on the basis of “essentiality” and non-availability from indigenous sources. War needs over-ruled others, and consumer goods were heavily discriminated against, hence favouring domestic production. In 1945, the British Government took a liberalizing step of placing consumer goods imported from Britain into India on open general license. The Government accepted that “the pattern of post-war trade should not be dictated by perpetuation of controls set up for purely war-time purposes”. In 1946 there was pressure for further liberalization of consumer goods in view of large foreign exchange balances accumulated due to India’s war contributions, and foods and consumer goods were placed on universal open general license. Within months, however, by March 1947, there was an end to liberalized imports, and the importation of gold and 200 “luxury” goods were banned. Only a few “essential” goods remained on the open list./
This experience set the pattern which was followed by the independent governments in India and elsewhere in the subcontinent. Quantitative restrictions on imports and the resulting quantitative exchange-control became primary instruments of Indian commercial policy. Instead of relying on the subtleties of decentralized market flows guided by price-measures like tariffs or exchange-rate changes, economic policy-makers in India and neighbouring countries tended to prefer quantitative actions which could be imposed, reduced or removed by administrative fiat.
With respect to foreign-exchange, from 1940 until when the Indian rupee moved towards market-determination and convertibility on current account in 1992/1993, the general tendency of Indian economic policy-makers was to view the exchange-rate not as an implicit price of the demand for foreign monies relative to domestic money, but as one among a number of administered prices open to be utilized by the Government for its purposes. Foreign exchange earnings of export and other hard-currency earning sectors were confiscated in exchange for Indian rupees at the administered rate, contributing to the thriving parallel foreign exchange market which has been the external trade and payments sector of the large parallel or “black” economy. Gross overvaluation of the rupee may have occurred during this period, contributing to long-term damage to India’s export competitiveness in the world economy.
Foreign exchange obtained from the earnings of exporters were then disbursed by rationing in the following order of precedence: first, to meet the Government’s debt repayments to international organizations and the Government’s expenditures abroad in conduct of its foreign policy like maintenance of embassies and purchase of defence sector imports; secondly, to pay for imports of food, fertilizers and petroleum; thirdly, to pay for imported inputs required by Government-owned firms; fourthly, to pay for import demands of those private firms which had been successful in obtaining import licenses; lastly, to satisfy demands of the public at large for purposes like travel abroad.
For the entire period until the 1990s, India and other countries of the subcontinent have had trade and payments regimes characterized by extensive controls, subsidies, barriers and licensing. Intricate systems of import-licensing based on “essentiality” and “actual user” criteria have been in place in pursuit of generalized import-substitution. In accordance with apparent goals of national economic planning, major industries were nationalized, and these have been leading consumers of imports obtained via administrative rationing of foreign exchange earnings obtained from export sectors. As consumer goods’ imports have been restricted most severely, the predicted consequence has been diversion of the domestic private sector towards production of consumer goods in the large highly protected domestic markets that have resulted, leading to quasi-monopolistic profits and finance of the parallel or “black” economy with its thriving foreign exchange sector. The restriction of consumer goods imports and gold imports has also caused profitable smuggling sectors as well as noticeable corruption in the integrity of customs services./ In sum, the patterns which have emerged of Indian exports to the USA and American exports to India have been determined by decisions made in quite different institutional contexts of the two economies:
— While American demand-decisions for Indian exports have tended to be decentralized and guided by usual factors affecting market demand, these decisions have been egregiously distorted by the protection of the domestic American textile and clothing industries.
— Indian demand-decisions for American exports have been mostly centralized within the agencies and departments of the Government of India, with only indirect reference made to the Indian public.
5. Analysis of United States Imports from India
The traditional exports of the Indian subcontinent were cotton and cotton goods, foodgrains, jute and jute manufactures, leather and tea, with destinations in Europe, Japan, the United States and China./ Today the main export markets for India and the neighbouring economies are the European Community, North America and Japan. Among the main exports have been clothing, textiles, leather goods and agricultural materials. Polished diamonds and petroleum have also become major export sectors in India since the 1980s. Tables 5.1. describes the destination and value of the exports from India and neighbouring economies to the rest of the world. Table 5.2. describes the product composition of exports from India and neighbouring economies to North America specifically./
Focusing on Indian exports to the United States in particular, Tables 5.3.1-5.3.4 describe the nominal and real changes of the four major Indian exports to the United States over the entire period 1962-1991.
In the first ten-year period under consideration, 1962-1971, the dominant Indian export to the United States was textile yarn and fabric (SITC 65). The remaining exports were mainly agricultural products, namely, tea, coffee & spices (SITC 07), fruit and vegetables (SITC 05), sugars (SITC 06), fish and preparations (SITC 03), and crude agricultural matter (SITC 29).
In the next ten years, 1972-1981, this mix was transformed by growth of exports of polished diamonds (SITC 66) and clothing (SITC 84), which along with textile manufactures have dominated Indian exports to the United States ever since. In the most recent decade 1982-1991, the same mix has continued to dominate with the significant addition of petroleum and products (SITC 33), petroleum being the single largest import from India reported by the United States to the U.N. data-base in each year between 1982 and 1985./
Textile manufactures (SITC 65) were the dominant export until 1978 and have been in the top four throughout the period. But there has been steady decline in real terms. The decline has been from an annual average, in constant 1990 U. S. dollars, of $740 million (c.i.f) in 1962-71, to $406 million in 1972-1981, to $285 million in 1982-1991. As indicated by Table 5.4 and Chart 5.1, India has steadily lost market-share in total textile imports into the United States, dominating the market with an average annual market-share of 20 percent in 1962-1971, reduced to 10 percent in 1972-1981, reduced further to less than 5 percent in 1982-1991. The imposition of American quotas has undoubtedly affected this loss in part.
Clothing (SITC 84) during the same period has shown high real growth, going from an annual average, in constant 1990 U. S. dollars, of $7 million in 1962-1971 to $178 million in 1972-1981, to $538 million in 1982-1991. Average annual market-share of total U. S. imports of clothing has gone from 0.10 percent in 1962-1971, to 2.11 percent in 1972-1981, to 2.34 percent in 1982-1991. While this has been small growth from the point of view of the U. S. market, the movement has been large relative to initial conditions from the point of view of Indian exporters. As shown in Table 5.5, there has been large-scale real growth of clothing from all countries of the subcontinent to the major industrial countries especially in the decade 1982-1991. Not only has there been remarkable growth in real terms of clothing exports from the entire region, but there has been relatively higher growth in Pakistan compared to India, and higher growth in Sri Lanka and Bangladesh compared to Pakistan. It is likely that some of the growth from Sri Lanka and Bangladesh has been derived from Indian capital investment in those countries to make use of their allocated quotas in U. S. protectionism. It is possible also that there has been substitution on the part of Indian exporters from textiles towards clothing in response to non-tariff barriers.
Overall, the story of Indian exports to the United States may be summarized by saying that while the long-run product composition has changed over thirty years, it has not done so in ways that had been expected or hoped for by India’s national economic plans. India has not become a major industrial power or even a significant small exporter of industrial goods in the world economy, as had been wished for by the framers of the Second Five Year Plan in the 1950s./
Textile manufactures, clothing, polished diamonds and petroleum account for approximately 70 percent of Indian exports to the United States.
Traditional exports like textiles and tea have seen drastic declines. While it is not clear whether clothing is traditional or non-traditional, there has been remarkable growth in that sector in the 1980s. Petroleum exports were not anticipated in India’s national plans yet dominated the short export boom which seems to have been registered in the early 1980s. Polished diamonds have shown spectacular growth as a result of Indian entrepreneurship at its best; however, value-added is significantly lower in view of the high import value of uncut diamonds imported via Belgium from South Africa. Although these are classified as “gems and jewelry”, to the extent the uses of diamonds have been industrial in the metal-working industries of the main importing countries of the USA, Germany and Japan, future growth of this sector may be affected by, for example, large expected sales of industrial diamonds by the United States Defense Department from strategic reserves held during the Cold War.
6. Analysis of Indian Imports from the United States
We turn next to examine India-United States merchandise trade from the other side.
In view of India’s commercial and exchange-rate policies described in Section 2, diverse factors appear to have affected the Government of India’s demand for American exports, including agricultural fluctuations, the Green Revolution and the state of international political relations.
Tables 6.1-6.3 describe the main trends to be detected in Indian imports from the United States. In the first ten-year period under consideration, 1962-1971, a dominant place in American exports to India was taken by food imports, mainly cereals like wheat, rice and corn (SITC 04). American institutions especially the Ford and Rockefeller Foundations played key roles in the mid 1960s in persuading India’s Food and Agricultural Minister, C. S. Subramaniam, to promote adoption of high-yielding varieties of wheat and rice in selected areas of the country. This went against the advice of most Indian economists at the time/, and in fact against the interests of America’s own farm lobbies as well.
Two direct results of this decision can be noticed in the trade-data reported in Tables 6.1-6.3. As is well-known, India was able to increase domestic food production spectacularly, permitting the reduction of cereal imports from the United States. Instead, India began since the mid-1960s to make large imports from the United States of manufactured fertilizers (SITC 56.2), which remain the single largest American export to India today at three-level SITC. American advice and assistance in stimulating the Green Revolution in India has certainly been a signal achievement of India-United States economic cooperation in the past.
The decline in Indian imports of American cereal in nominal and real terms can be seen in Table 6.4. In constant 1990 US dollars, average annual cereal imports have declined from $630 million in 1962-1971, to $295 million in 1972-1981, to an estimated $160 million in 1982-1991. Although the trend in Indian cereal output has been towards greater self-sufficiency, a random element still appears depending on the vagaries of the monsoon and the Government’s management of the country’s food-stocks. This is indicated by the large surges in cereal imports of 1975, 1976, 1983 and as recently as 1988.
Other than foods, a large component of American exports to India has been machinery and transport equipment, including aircraft and aircraft parts. Table 6.4. indicates that during the 1970s when India-United States political relations were not at their best, a distinct fall in real terms can be discerned of Indian imports of American machinery and transport equipment. Indian quotas for textile imports into the United States also likely suffered from weak political relations at the time.
Since the 1980s, American manufactured exports have started to climb again. In constant 1990 U. S. dollars, average annual imports of American machinery and transport into India was $717 million in 1962-1971, down to $456 million in 1972-1981, rising again to an estimated $673 million in 1982-1991.
The sporadic aspect to some of the Indian demand for American exports may be noticed also in case of the sudden large increases in imports of fixed vegetable oil (SITC 42) between 1977 and 1980, and in imports of cotton fibres (SITC 26) in 1977 and 1979./
In the period 1982-1991, the composition of Indian imports from the United States has seen some change with the growth of scrap iron ore and waste (SITC 28.2); precision instruments (SITC 87.4); pulp and waste paper (SITC 25); crude fertilizers (SITC 27); chemical elements and compounds (SITC 51), and plastics (SITC 58). Along with manufactured fertilizers and machinery and aircraft, these presently dominate United States exports to India.
As reported by the United States Commerce Department, India’s restrictive trade barriers in the past led to many American companies identifying potential export items but simply giving up in the face of quantitative restrictions and steep tariffs. Following the start of the economic reform process in July 1991, the United States has expressed the expectation that greater openness and transparency in the Indian trade-regime will lead to a significant increase in trade and investment. Lower Indian tariff barriers are expected to benefit a number of American exporters who presently face the tariff levels indicated: fertilizers (60 percent); wood products (110 percent); ferrous waste and scrap (85 percent); computers, office machinery and spares (95 percent); soda ash (over 50 percent); heavy equipment spares (80 percent); medical equipment components (40 percent); copper waste and scrap (50 percent); and agricultural products (135 percent).
Economics, when candidly treated, is indeed the dismal science, and any candid assessment of India-United States merchandise trade may have to conclude that there is no compelling reason at present to expect large movement away from past trends.
In the opinion of the author, sources of significant new growth in Indian exports to the United States, and indeed to the rest of the world, do not seem to be easily identifiable./ While small advances may well be made in new sectors by Indian exporters, the great bulk of Indian export earnings from the United States market will continue to be accounted for by textile manufactures (SITC 65), clothing (SITC 84), polished diamonds (SITC 66) and petroleum and products (SITC 33).
Of these, diamonds and petroleum may be expected to face fluctuating demand conditions, while textiles and clothing will continue to face high non-tariff barriers. Given the political strength of the domestic textile and clothing industry in the United States, such a situation may be nearly permanent, or at least no change can be expected in the near future. The fact that the United States remains the single largest trading partner for India, while India in 1992 was the USA’s 36th largest export market (down from 25th in 1986) accounting for less than 1 percent of total American trade and barely 3 percent of American trade with all of Asia, makes it inevitable that a disparity of economic power will affect the course of bilateral economic relations.
Successful commerce depends on intangible quantities like trust, reliable information and contacts between individual contracting parties. The declines in real terms which seem to have occurred in India-United States commerce in the past have led to wastage of this kind of informational capital and commercial trust. American importers and exporters have established new relations with others among India’s competitors in East Asia and Latin America. For Indian entrepreneurship to win back old customers and investors or win new ones will be extremely difficult. The radical changes in Indian economic policy of the last few years have at least reduced Government-imposed barriers towards this — vindicating the tiny minority of critics, starting with Shenoy, who had more or less correctly diagnosed the folly of India’s economic policies now abandoned. As in Kalidasa’s story of the man cutting the branch of the tree on which he sits, the cutting at least appears to have ceased for the time being.
From the point of view of American exporters to India, prospects may seem more promising in view of the breakthrough which has been achieved in Indian economic policy-thinking in the last few years. The large potential scope for expansion of India-United States trade depends squarely on (a) the deepening of Indian reforms; and (b) removal of the egregious American protectionism in textiles and clothing.
American exports to an enormous market-based Indian economy founded on principles of private property and free exchange, with democratic political institutions and an open society (and assuming political stability), will come to depend eventually on the price and quality of American products and the income-levels of Indian importers. But these ultimate factors can only be improved by the growth of Indian exports in turn. Large-scale real growth of exports from India are necessary not only if the Indian market is to generate effective demand for foreign imports, but even to finance the large external borrowings on capital account on which the entire adjustment depends. It is in such a context that the constraints on Indian textiles and clothing exports imposed by powerful domestic producer interests in the importing economies have to be seen.
The most promising source of export earnings for India may be in fact via a multilateral forum if there could be a successful completion of the Uruguay Round trade talks. It has been estimated that with a 30 percent reduction in tariffs and non-tariff barriers in the USA, Europe and Japan, India’s exports to these markets would grow by more than $1.8 billion over the actual 1991 exports of $5.6 billion. With a 50 percent liberalization, the growth would be almost $3 billion more than the actual 1991 figure./
Although completion of the Uruguay Round itself may be a subject of wishful thinking, Indian external economic policy would be well-advised to base itself on the principle of increased world trade and access to markets, including reduction of barriers to movement of capital and labour.
Balassa, Bela (1978), “Export Incentives and Export Performance in Developing Countries: A Comparative Analysis”, Weltwirtschaftliches Archiv 114.
Balassa, Bela (1980), The Process of Industrial Development and Alternative Development Strategies Princeton Essays in International Finance 141.
Bhagwati, Jagdish & Padma Desai (1970) India: Planning for Industrialization, OECD, Paris.
Bhagwati, Jagdish & T. N. Srinivasan (1975) Foreign Trade Regimes and Economic Development: India National Bureau of Economic Research, New York.
Chaudhuri, K. N. (1982) “Foreign Trade and Balance of Payments 1757-1947” in The Cambridge Economic History of India edited by Dharma Kumar, Cambridge University Press.
Cline, W. (1987) The Future of World Trade in Textiles & Apparel, Inst. for Int. Economics, Washington D. C.
Desai, Ashok (1991), “Output and Employment Effects of Recent Changes in Policy”, in Social Dimensions of Structural Adjustment in India, ILO, New Delhi 1991.
Erzan, Refik, Junichi Goto & Paula Holmes (1989) “Effects of the Multi-Fibre Arrangement on Developing Countries’ Trade”, World Bank International Economics Department WPS 297.
Friedman, Milton (1992) “A Memorandum to the Government of India 1955”, in Subroto Roy & William E. James (eds), Foundations of India’s Political Economy: Towards an Agenda for the 1990s, Sage.
Hamilton, C. B. (1988), “Restrictiveness and International Transmission of the New Protectionism”, in R. Baldwin, C. B. Hamilton and A. Sapir (eds), Issues in US-EC Trade Relations, University of Chicago Press.
Hopper, David (1978) “Distortions of Agricultural Development Resulting from Government Prohibitions” in T. W. Schultz (ed.) Distortions in Agricultural Incentives, Indiana University Press.
Hufbauer, Gary, D. Berliner and K. Elliott (1986) Trade Protection in the United States: 31 Case Studies, Institute for International Economics, Washington D. C.
International Monetary Fund (1992) International Financial Statistics.
Keynes, John Maynard (1920) The Economic Consequences of the Peace, Harcourt, New York.
Primo Braga, C. & Alexander Yeats (1992) “How Minilateral Trading Arrangements May Affect the Post-Uruguay Round World”, World Bank International Economics Department WPS 974.
Roy, Subroto (1984) Pricing, Planning and Politics: A Study of Economic Distortions in India, Institute of Economic Affairs, London.
Roy, Subroto (1990) “Draft Memorandum on India’s Agenda 1990-2000: Notes on Policy for the First 18+ Months of a 5-Year Term”, a confidential memorandum to Rajiv Gandhi, October 26 1990. (Published versions have appeared as “A Memo to Rajiv, I, II, III”, The Statesman July 31-August 2 1991).
Roy, Subroto (1993) “Exchange Rate Policies in South Asia”, unpublished study, International Monetary Fund.
Safadi, Raed and Alexander Yeats (1993) “NAFTA: Its Effect on South Asia”, World Bank International Economics Department Working Paper.
Shenoy, B. R. (1955) “A Note of Dissent”, Papers Relating to the Formulation of the Second Five Year Plan, Government of India Planning Commission, New Delhi.
Sims, Holly (1988), Political Regimes, Public Policy & Economic Development: Agricultural Performance and Rural Change in Two Punjabs Sage.
Srinivasan, T. N. (1992) “Planning and Foreign Trade Reconsidered”, in Foundations of India’s Political Economy edited by Subroto Roy & William E. James, Sage.
Tarr, D. and M. Morkre (1984) Aggregate Cost to the United States of Tariffs and Quotas on Imports, United States Federal Trade Commission.
Tomlinson, B. R. (1992) “Historical Roots of Economic Policy” in Foundations of India’s Political Economy edited by Subroto Roy & William E. James, Sage.
United Nations (1955) Yearbook of International Trade Statistics.
World Bank (1992) Global Economic Prospects and the Developing Countries, Washington D. C.
/ …..The author is a consultant economist in the Washington area. His publications include Philosophy of Economics (Routledge 1989), and (co-edited with W. E. James), Foundations of India’s Political Economy: Towards an Agenda for the 1990s and Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s (Delhi & Karachi: Sage & OUP 1992). Correspondence may be addressed to…. Va. 22209.
/ John Maynard Keynes’s description of the Versailles Conference is perhaps the most graphic picture of America’s rise to predominance over Europe since the end of the First World War: “[T]he realities of power were in [President Woodrow Wilson’s] hands. The American armies were at the height of their numbers, discipline, and equipment. Europe was in complete dependence on the food supplies of the United States; and financially she was even more absolutely at her mercy. Europe not only already owed the United States more than she could pay; but only a large measure of further assistance could save her from starvation and bankruptcy.” Keynes (1920, p.38).
/ On the economic costs incurred by importing countries from protecting their domestic textile sectors from import competition, see for example Erzan et al (1989), Cline (1987), Hamilton (1988), Hufbauer et al (1986), and Tarr & Morkre (1984).
/ The multiple distortions of domestic and external sectors of the economy caused by these procedures have been documented and analyzed by a number of observers. Early advocacy of liberal economic policies and a market-determined rate for the rupee came from Shenoy (1955) and Friedman (1992). The treatment of B. R. Shenoy, as a result of his prescient and singular critique of conventional majority-views at the time, remains a permanent disgrace upon the Indian economics profession. Friedman’s statement was similarly neglected, and remained unpublished and undiscussed among Indian economists from 1955 to 1992. Later advocates of similar positions include Bhagwati & Desai (1970); Bhagwati & Srinivasan (1975) and Roy (1984). See also Desai (1991), Srinivasan (1992), and Roy (1993).
/ Chaudhuri (1982). Britain (23.5 per cent of total value), Japan (10.8 per cent), the United States (9.4 per cent), Germany (6.5 per cent), China (6.0 per cent) and France (5.0 per cent). The value composition of exports was: raw cotton (21.0 percent), cotton goods (1.6 percent), foodgrains (13.5 percent), raw jute (5.8 per cent), manufactured jute goods (14.5 per cent), hides and skins (8.1 per cent) and tea (10.7 per cent). All figures for 1930-1931.
/ Tables 5.1 and 5.2 are reproduced from Safadi & Yeats (1993) with the kind permission of the authors.
/ A discrepancy exists in the data as Indian data to the UN do not report any exports of petroleum to the USA or France in these years, when both the USA and France report receiving such imports as the top import from India. It is possible for an exporter to export without knowing the final destination of a product.
The author has not been able to determine if India’s petroleum exports were of crude oil, e.g. because of lack of refining capacity in India; or of non-crude classified as SITC 33.4. The United States Embassy in New Delhi in the mid 1980s suggested the former; latest U. S. Department of Commerce data suggest the latter.
/ Developing countries among the world’s 25 largest exporters of high-tech manufactured goods as of 1988, with their share of world high-tech exports and value of high-tech exports were: Taiwan (3.2 percent, $16.6 million); Korea (2.9 percent, $14.7 million.); Singapore (2.4 percent, $12.5 million.); Hong Kong (1.6 percent, $8.4 million.); Mexico (1.4 percent, $7 million.); Malaysia (1.2 percent, $6 million.); China (1.1 percent, $5.4 million.); Brazil (0.6 percent; $3 million.); Thailand (0.4 percent; $1.9 million.); from Braga & Yeats (1992, p.29).
/ See Hopper (1978) for an eyewitness account of how Subramaniam was prevailed upon to go against the advice of his advisers, which he did, leading to the largest seed transfer in history of 18,000 tons from Mexico to India. Also Sims (1988, p. 38).
/ The prediction made in Roy (1990) of an export boom following economic reforms has proven to be erroneous, in spite of the progress made in changing the broad direction of Indian economic policy. This was a memorandum dated October 26 1990 written at the invitation of the late Rajiv Gandhi then Leader of the Opposition, which contributed to the Congress Party’s economic manifesto in 1991. Mr. P. Chidambaram, former Commerce Minister in the Narasimha Rao Government, received the memorandum in hand from Mr. Gandhi in late October 1990. He has recently said that the economic reform program “was not miraculous” but was in fact based on the rewriting of the Congress manifesto when the Congress Party was in Opposition. “We were ready when we came back to power in 1991”. News India April 30 1993, p. 33.
/ World Bank (1992, Appendix C2, p.52). Safadi & Yeats (1993) estimate that India may have lower exports to North America by up to $17 million dollars from trade-diversion towards Mexico as a result of the North American Free Trade Association. They affirm the overwhelming importance for India of the gains from the Uruguay Round in response to regionalism.