India’s five-year plans (FYPs) highlighted the import substitution policy under India’s inward-looking strategy. This meant that the goods that can be produced domestically should be produced domestically rather than importing from the foreign market. The domestic producers could thus sell their products in the Indian markets without any foreign competition. The main aim here was to boost the economic growth of the nation and achieve self-sufficiency. Such an economy is also known as a closed economy. Up until the 1990s, India chose to remain as a closed economy.

The system of import substitution and import restrictions was implemented with the help of a number of different methodsー through the imposition of a) Tariffs, b) Quotas.

Extremely high tariffs were levied on imported goods making them very expensive for the Indian consumers. This eventually forced them to buy goods that have been made domestically rather than the imported items.

The quota system led to the fixing the maximum limit on the imports made by a domestic consumer. Only a certain amount of very essential items such as raw materials and capital equipment were allowed to be imported and used. That means, if the producers wanted extra materials, they had to fend for themselves.

No doubt that the inward looking strategy brought a rise in the foreign trade sector with the domestic producers gaining exponentially but towards the early 1990s, the Indian law makers realised that there are many loopholes in the current foreign trade policy that they adopted. The main problem was that the domestic producers made no sincere efforts to step up the quality of their products, forcing the Indian consumers to purchase whatever was supplied by them.

In 1962, a review committee was formed to discuss the changes required in the government’s existing foreign trade rules and hence, in 1985, then Finance Minister V.P. Singh announced the EXIM Policy (short for Export-Import Policy) which formulated the export and import policies of the country. Initially, the policy was meant to be followed for a period of three years. Later from 1991, the policies were revised every 5 years in view of the changing international economic context. The EXIM policy came into being to get a better view of the trade situation of the country and to correct trade deficits, if any.

In the year 1991, India received a major setback. The Indian government availed a loan of $7 billion from the IMF (International Monetary Fund) and the World Bank due to its inability to manage the economic condition of the country. In order to avail the loan, these international agencies expected India to liberalise, privatise and globalise its economy. The Indian government thus announced the New Economic Policy (NEP), popularly known as the LPG (Liberalisation, Privatisation, Globalisation) policies. Under the New Economic Policy, quantitative restrictions that were imposed after independence were substantially removed. For example, by the year 2001, import restrictions on manufactured consumer goods and agricultural products were completely eliminated. Similarly, tariffs were removed to a great extent in order to increase the competitiveness of the domestic goods in the foreign markets and to improve the quality of the products.

The first EXIM policy came into effect in 1992 and was effective until 1997. This policy aimed at removing the various protectionist measures that were taken by the Indian government previously. After that, the second EXIM policy started in the same year (1997) and stayed up until 2002. This time the focus was on making India a globally oriented economy through the adoption of a set of schemes such as the Export Promotion Capital Goods Schemes and Advanced License Schemes aimed at increasing investments from abroad. The next EXIM policy emerged after 2 years i.e. in 2004 up to 2009 (major trade decisions were taken under this EXIM policy which is why it is also called the ‘Trade Constitution’), under which newer policies such as Target Plus which focussed on providing incentives to producers and exporters with duty-free credit and Free Trade Zones. Soon after, the fourth EXIM policy came into effect from 2009 till 2014 which brought in new initiatives known as Focus Market scheme and product market scheme to help exporters compete in foreign markets and incentivise the export of those products which have high employment intensity. The fifth EXIM policy came after one gap year and came into effect in 2015 and stayed till 2020. This policy focussed on the export as well as the manufacturing services to improve the ease of doing business to increase India’s exports and thus increase its participation in the global market.

Fig 1. Imports of goods and services (% of GDP) – India | Source: World Bank

Fig 2. Exports of goods and services (% of GDP) – India | Source: World Bank

On March 31, 2020, the Government of India decided to extend the Foreign Trade Policy 2015-2020 for one year in light of the Covid-19 situation. It was to expire on March 31, 2021, but the Directorate General of Foreign Trade (DGFT) again extended FTP 2015-20 up to September 30, 2021, and it has been operational since.

References:

1. Arora, S. (2019). What are the objectives of Foreign Trade Policy in India? Legodesk. https://legodesk.com/legopedia/foreign-trade-policy-india/

2. India’s International Trade Policy – EXIM Policy. Economics Discussion. https://www.economicsdiscussion.net/international-economics/indias-international-trade-policy-exim-policy/4241

3. Soares, N. (2014). Foreign Trade Policy of India since 1980. Slideshare. https://www.slideshare.net/NikhilSoares/foreign-trade-policy-of-india-since-1980

4. Saluja, N. (2021). Govt extends current foreign trade policy till September. The Economic Times. https://m.economictimes.com/news/economy/foreign-trade/govt-extends-current-foreign-trade-policy-till-september/amp_articleshow/81777971.cms

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CULTURAL, ECONOMIC AND POLITICAL LINKS

As vast the relationship between India and Maldives is, there are a few special characteristics which define the relationship in a summarized sense. First, talking about the cultural relationship, mention has to be made of the immense use of soft power by India to advance its relationship with the Maldives. The cultural development between the two countries has come from various forms of capacity building. India has assured a good relation with Maldivian students and provided them with a high level of skills training and capacity building. Scholarships and easy access for them is a key positive in the relation between the two countries. The Maldives has based its economy highly on tourism and India has not shied away from help. The Indian Cultural Centre was established in July 2011 in Male and it has brought the countries much closer than before. The Indian diaspora in the Maldives forms a crucial part of the population in the Maldives with a population of around 26,000. Around 30% of the doctors and 25% of teachers are of Indian origin.

This sustenance of Indians in the Maldives has increased the spread of their respective cultures. Even though cultural relations have been always on the rise, the economic and political relations are also to be considered. Politically talking, India has always stepped up whenever there is uncertainty within the Maldives. The 1988 Operation Cactus was the biggest example of Indian aid in times of a crisis. Back in 88, 80 armed militias from the PLO of Tamil Eelam had landed in the island country and had been working on taking over the government. India sent troops and was able to eliminate the threat. This brought the two countries closer than ever. After that, in 2014 during the water crisis in Male, India sent its ships to help produce freshwater. The most recent political crisis was back in 2015 when the first democratically elected president of Maldives, Mohammed Nasheed was arrested on terror charges. India along with the US voiced their displeasure on the arrest. The new President Abdulla Yameen had strained the relations with India, claims the current foreign affairs minister of Maldives, Abdulla Shahid. After Yameen’s defeat in 2018, the political relations were again restored. Maldives FM says that he is confident of the positive relations and this restoration was visible during the COVID crisis.

India, at the very start of the crisis, provided 6.2 tonnes of medical-aid to the Maldives, followed by constant medical and pharmaceutical help.  The economic relations are even more in-depth and have been helpful for both countries. The 1981 Comprehensive Trade agreement has helped the Maldives prosper in the years. Annually, bilateral programmes have been agreed upon where development of infrastructure, health, communication and labour has prospered in the Maldives. Coming back to the 1981 agreement, the export of essential commodities, which was initially modest, have now reached new highs. In 2014, trade stood at 677 Cr Indian Rupees and in 2019 India’s export to the Maldives stood at 212 Million dollars, which clearly shows how trade has developed in the past few decades.

COMPLICATIONS WITH THE ENTRY OF CHINA

In the friendly relationship with India, China entered as a wild card, with the exceptional claims of helping the Maldives grow, economically and infrastructure wise. Once, Yameen came into power in 2014, he made sure that there was a lack of cooperation with India and an inclination towards China. The successive government has accepted that Yameen tried to play both India and China but failed spectacularly. This connotation is partly true. Back in 2014, as a part of its Belt and Road Initiative, China offered loans to the Maldives to help them develop infrastructure. The lack of foresight has come back to haunt the Maldives who had created a huge debt. Currently, the government says that they still owe $600M and with an economy highly dependent on tourism, in the time of a pandemic, find it very difficult to pay the debt off. Reaching this position was difficult as well. It was Indian Prime Minister, Narendra Modi who had put his ‘Neighbour First’ policy into good use by providing the Maldives $1.4B in financial assistance. The situation of Maldives can be seen in parallel to that of Sri Lanka. India’s southern neighbour also took a loan from China to increase its infrastructural capabilities but when it was unable to pay back the loan, China got a 99-year lease over a  crucial Lankan port.

One could say that India has saved the Maldives from a similar situation but the future is known to none. The current Maldives Foreign Minister has said that they will be reconsidering their current agreements with China.  Nonetheless, he has also at times stated that Beijing has been very generous in social development projects, mainly in the housing sector. In terms of rethinking, Maldives wants to bring China to the negotiation table to find a way out and pave the way for future partnerships. Keeping in mind the previous agreements playing highly in Chinese favour, such future partnerships do not sit well with the Indian government who has expressed concerns. Nonetheless, the Maldives foreign minister has always claimed that India is the closest friend of Maldives. At this point, it can be inferred that China is a short term partner of Maldives, whereas India has always been considered a long term ally. India cannot throw caution in the wind and start diplomatic cold war with the Maldives to force its way out of Chinese relations. For a country like the Maldives, having strategic partners in the geographical proximity is the way forward. They also claimed that the Maldives will be looking to develop relations not only with India and China but also the USA and UAE. India will need to keep Maldives’ natural growth in mind in its future endeavours with the Maldives.

CONCLUSION

India’s relationship with the Maldives has been a natural one for decades and except for a few hiccups in between, it is widely claimed that India is the most crucial partner of Maldives. India needs to realise this and assure long term stability with them. India also needs to keep in mind that the Maldives will be growing in terms of diplomatic power by trying to increase its bilateral partnerships. At this point, India needs to continue doing what it has been for the past few decades and sustaining a long term partnership won’t be difficult. The Indian government needs to keep in mind what Maldives FM thinks the relationship is based on. He says, “It is not a relationship based on size or economy, but one based on ideas and principles.”

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