The year 1957 proved to be a watershed year for import policy. Two factors contributed to initiating changes that eventually turned India into a near autarky. First, over the years, higher inflation at home than abroad combined with a fixed nominal exchange rate rendered domestic products progressively less competitive than their foreign counterparts. This fact led to a steady rise in import demand and stagnation in export revenues.
Initially, the government maintained a liberal import policy by drawing down on the sterling balances. But a sharp decline in the sterling balances from Rs. 7.42 billion in January 1956 to Rs. 5.39 billion in November 1956 due to a rapid expansion in imports left B. K. Nehru, then a senior official in the finance ministry, deeply disturbed at this rapid “hemorrhage in our foreign exchange resources.” The immediate reaction of the ministry was to begin pressing brakes on imports to slow down the depletion of the sterling balances in the remainder of the year.
The second development leading to the inward turn in the import policy around this time was the launch of the ambitious Second Five-Year Plan with its key goal of developing heavy industries locally. In the process, all ministries were drawn into rethinking their policies in ways that would aid the effort to give a big push to the economy in general and heavy industries in particular.
For import policy, this meant a turn away from consumer goods imports to spare foreign exchange for the imports of investment goods, raw materials, and components used in heavy industries and not produced domestically. Therefore, the import policy was to reorder priorities away from consumer goods toward machinery, raw materials, and components not available at home.
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Import Policy Tightens
These considerations led the government to take two critical steps toward tightening the import-policy regime. First, it decided to reintroduce foreign-exchange budgeting beginning on January 1, 1957. Foreign-exchange budgeting consisted in placing a ceiling on the total volume of foreign exchange available for imports and administratively allocating it among its different uses in a manner I shall describe later in this chapter.
Second, the government began making its import policy progressively more restrictive. Immediately, the import policy announced for the first half of 1957 made drastic cuts in import quotas of 509 items and outright denial of licenses for several items perceived as nonessential. A contemporary Times of India report stated, “The import policy for January–June, 1957, more restrictive than any time during the last five years, is designed to effect a saving of Rs. 30 crores [Rs. 300 million] in foreign exchange.”
It went on to add, “Liquors, cigarette, toilet requisites, paper, woolen fabrics, cutlery, motor parts, species, betelnuts, fruits, tallow, lead pencils, patent and proprietary medicines and coal tar dyes are among the commodities whose imports will be cut.” These and other items impacted by the cuts testify to the long list of consumer goods whose imports had been permitted more liberally until the end of 1956.
They also included musk oil, shoes, billiard accessories, golf clubs, roller skates, fish, bacon, ham, condensed milk, butter, powdered milk, fruits, cocoa, jams, jellies, and fruit juices.
Until 1956, separate licenses had been issued for sterling-area countries and dollar-area countries due to the greater dollar scarcity. But given the dwindling stock of sterling balances, the pound became scarce as well, and the government decided to substantially reduce the discrimination against the dollar by permitting the holders of licenses for imports from sterling-area countries to utilize them for imports from dollar-area countries more liberally. From the importers’ viewpoint, this was a positive step since it allowed them to buy their imports from the cheapest source available regardless of the currency area of the seller.
At the end of the first half of 1957, the government aligned the import policy to the financial year. Therefore, rather than announce the next policy for the entire second half of the calendar year, it restricted it to three months spanning July to September and followed it up by a six-month policy covering the second half of the fiscal year 1957–58, that is, October 1, 1957 to March 31, 1958.
Both policies adhered to the spirit of the predecessor policy for January–June 1957. The policy for July–September did away with open general licenses except in the case of poultry, fish, fresh vegetables, and eggs from Pakistan and, with rare exceptions, restricted new import licenses to capital goods and essential raw materials. These measures translated into the established importers being denied any new licenses.
The policy for the October–March period continued the ban on open general licenses and placed a total ban on many consumer goods imports, including tobacco manufactures, woolen fabrics, bicycles, watches, fountain pens, crockery, cutlery, glassware, and shaving blades. More essential consumer goods were permitted but in reduced quantities. These goods included milk foods, species, betelnuts, cinema films, sports goods, and drugs and medicines. A more liberal view was taken of imports of raw materials, spares, and replacement machinery.
Though these restrictive measures alleviated foreign-exchange shortages in the longer run, they were less effective in the short run. The reason was that an estimated Rs. 4.35 billion worth of unutilized import licenses had existed at the beginning of July 1957. As a result, the sterling balances declined by a hefty Rs. 1.13 billion between the middle of June to September as against Rs. 0.64 billion in the preceding three months. This trend continued in the second half of 1957–58, resulting in total imports during the full fiscal year exceeding those in 1956–57.
Import policy for the first half of 1958–59 relaxed imports of parts and raw materials for some industries considered essential such as printing machinery, agricultural tractors, and photographic paper, but slashed the imports of consumer goods such as fish, fruits, and milk foods. The net effect of these changes was to hold the total import expenditure at the same level as the second half of 1957–58. The policy for the second half of 1958–59 also remained restrictive, with the possibility of some external assistance allowing the total expenditure on imports to be raised marginally by Rs. 40 million.
The policy in the following three years followed the same pattern with minor tweaks. In particular, there was a further movement away from established importers to actual users, and incentives in the form of more liberal imports were introduced for exporters. The policy in the first half of 1959–60 made marginal adjustments in the composition of imports, leaving the overall size of the foreign-exchange budget unchanged from the second half of 1958–59
The overall expenditure on imports was kept unchanged in the second half as well, with exporters provided an incentive such that they could use the sales proceeds of additional exports to finance capital goods imports. The process of incentivizing exporters continued in 1960–61 and 1961–62 with small tweaks to imports of specific products in each six-monthly policy but no fundamental change.
On the recommendation of the Mudaliar Committee report on export and import policies and procedures, submitted in March 1962, import policy was made an annual affair beginning with the fiscal year 1962–63. Correspondingly, import licenses also became annual though foreign-exchange allocation remained a twice-a-year affair.
Because of the possibility of a reduction in foreign-exchange allocation in the second half of the year, the license holder was allowed to affect only half of the authorized imports in the first six months. He had to get the license revalidated for the second half of the year with the possibility of reduced entitlement of imports.
The policy for 1962–63 restricted the imports by established importers further by banning sixty-five new items. Though licensing of a few items such as coal tar dyes, newsprint, and transport equipment was subject to marginal liberalization, broadly speaking, restrictions on the imports of raw materials and machinery remained as stringent as ever.
Furthermore, in December 1962, a drop in the foreign-exchange reserves by Rs. 500 million in the preceding twelve months led the government to ban the imports of consumer goods items such as liquor and tape recorders. Cuts were also applied to the imports of motor vehicle parts by established importers and certain items imported by actual users.
Finally, the policy for 1963–64 brought some relief to established importers by expanding the list of permitted imports by them from 91 to 170 items and restoration of some of the cuts in the quotas in the previous year.
In addition, the policy gave greater consideration to the needs of defense and export industries. But overall liberalization was limited, with extra foreign exchange in the first half of the year limited to Rs. 10 to 20 million over what had been provisioned in the second half of 1962–63. Thus, in sum, the policy from 1957 until the end of the Nehru era remained highly restrictive.
This excerpt from ‘The Nehru-Era Economic History and Thought & Their Lasting Impact’ has been published with permission from Oxford University Press.