The liberalization has taken place in the economy since 1991 as follows:

1. Freer Imports and Exports: In the pre-reform period, India's trade policy regime was complex and cumbersome. There were different categories of importers, different types of import licenses, alternate ways of importing etc. Substantial simplification and liberalisation in all these respects has been carried out in the reform period. The tariff-line wise import policy was first announced on March 31, 1996 and at that time itself 6,161 tariff lines were made free.

2. Rationalisation of Tariff Structure: On the recommendations of the Chelliah Committee Report in January 1993, the Finance Minister announced substantial cuts in import duties in 1993 - 94, the 1994 - 95 and the 1995 - 96 budgets. The 1993 - 94 Budget reduced the maximum rate of duty on all goods from 110 per cent to 85 per cent except for a few items including passenger luggage and alcoholic beverages. The 1994 - 95 Budget further brought down the maximum rate of duty on all goods from 85 per cent to 65 per cent. This was brought down to 50 per cent in the 1995 - 96 Budget and further to 40 per cent in the 1998 - 99 Budget. The 2000 - 01 Budget reduced the peak rate of basic customs duty to35 per cent. Thus there are now only four customs duty rates of 35 per cent, 25 per cent, 15 per cent and 5 per cent.

3. Decanalisation: A large number of exports and imports used to be canalised through the public sector agencies in India. The supplementary trade policy announced on August 13, 1991 reviewed these canalised items and decanalised 16 export items and 20 import items. The 1992 - 97 policy decanalised imports of a number of items including news-print, non-ferrous metals, natural rubber, intermediates and raw materials for fertilisers. However 8 items (petroleum products, edible oils, cereals etc.) were to remain canalised. The EXIM Policy 2001 - 02 put 6 items under special list-rice, wheat, maize, petrol, diesel and urea. Imports of these items would be allowed only through State trading agencies. Their import will not be theoretically canalised, but for all practical purposes they would be so.

4. Convertibility of Rupee on Current Account: The exchange rate policy in India has evolved from the rupee being pegged to a market related system (since March 1993). The exchange rate is largely determined by the market, i.e., demand and supply conditions.

a) Partial Convertibility of Rupee:

The Finance Minister announced the liberalised exchange rate mechanism in the Budget for 1992 - 93. This system introduced partial convertibility of rupee. Under this system a dual exchange rate was fixed under which 40 per cent of foreign exchange earnings were to be surrendered at the official exchange rate while the remaining 60 per cent were to be converted at a market determined rate

b) Full Convertibility on Trade Account:

The 1993 - 94 Budget introduced full convertibility of the rupee on trade account. As a result, the dual exchange rate system was dispensed with and a unified exchange rate system introduced. Under the unified exchange rate system, the 60:40 ratio was extended to 100 per centconversion. This 100 per cent conversion was extended for almost the entire merchandise trade transactions and all receipts, whether on current account or capital account of the balance of payments.

c) Full Convertibility on Current Account:

Current account convertibility is defined as the freedom to buy or sell foreign exchange for the following international transactions:

i) all payments due in connection with foreign trade, current business including services, and normal short-term banking and credit facilities;

ii) payments due as interest on loans and as net income from other investments;

iii) payments of moderate amount of amortization of loans or for depreciation of direct investments; and

iv) moderate remittances for family living expenses.

5. Steps towards Convertibility on Capital Account: While convertibility on current account has been accomplished, convertibility on capital account is being carried out slowly and cautiously. Caution is necessary because convertibility on capital account can lead to substantial flight of foreign exchange from the country. 'Hot money' transactions can increase the volatility in foreign exchange market and create serious distortions in the entire domestic economy. Therefore, the Government of India has correctly decided to introduce convertibility on capital account only in stages. For this

purpose, different Union Budgets have been successfully 'opening up' and liberalising certain capital transactions.

6. Trading Houses: The 1991 policy allowed export houses and trading houses to import a wide range of items. The Government also permitted the setting up of trading houses with 51 per cent foreign equity for the purposes of promoting exports. Under the 1992 - 97 trade policy, export houses and trading houses were provided the benefit of self certification under the advanced licence system, which permits duty free imports for exports.

7. EOU/EPZ/EHTP/STP: The units undertaking to export their entire production of goods may be set up at Export Processing Zones (EPZs), Electronic Hardware Technology Park (EHTP), Software Technology Park (STP) and Export Oriented Units (EOUs). Recently certain changes have been introduced in these schemes.

8. Special Economic Zones: The annual EXIM Policy for the year 1999 -2000 announced on March 31, 1999 proposed the setting up of Free Trade Zones (FTZs) in the country. The FTZ scheme was to be operational from July 1, 1999. The idea was to insulate the zones from bureaucratic interference and export restrictions.

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