History of India’s Trade Liberalisation


Following independence from the British rule in 1947, India embarked on a socialist strategy of development, which envisaged a heavy role for the government and the public sector in shaping India’s economy and industrialization. The strategy relied on import-substitution, emphasized the role of the government in providing infrastructure, as a regulator, and as a provider of goods and services.
Throughout the 1960s and 1970s, the growth rate of GDP in India had been stagnant at 3−3.5 percent per annum (what came to be known as the Hindu rate of growth). Beginning in the early 1980s, there was some emergence of thinking about the need for a change in trade policy (Das, 2003). During the 1980s, the limitations of inward oriented development strategy, import substitution based industrialization, extensive government control, and the license raj were becoming increasingly evident.
The trade regime in the early 1980s was characterized by high nominal tariffs and nontariff barriers coupled with a complex import licensing system. In addition, India’s tariff structure was very complex with a myriad of exemptions applicable to the basic duty rate and this was one of the areas which the trade reforms initiated in 1991 dealt with.
 During the late 1980s, the then government took the first steps towards reducing state control. These were not only on the external policy front but also related to domestic industrial policy. Steps were taken to ease industrial and import licensing, replace quantitative restrictions with tariff barriers, simplify the tariff structure, and importantly, this was the first instance of a three-year trade policy. There were conscious efforts to dismantle the import licensing regime via reductions in the number of products listed under banned/restricted category (Das, 2003). However, these measures were too little and left a lot to be desired.
Till 1991, the levels of protection were very high―in 1991, the average tariff rate was 117 percent and the import coverage ratio was 82 percent. The years 1989–91 were marked by difficulties, both on the economic and political fronts. As the new government took over the treasury benches in 1991, India was facing an impending external payments crisis with foreign currency assets less than US$1 billion, just enough to cover two weeks of imports. The Government of India requested a Stand-By-Arrangement from the IMF in August 1991 and entered into an IMF-supported program. In addition to deficit reducing policies, a wide array of policies spanning the external, trade, industrial, public sector, financial and banking sectors were implemented. Some of the measures on the external front included elimination of the monopoly of state trading agencies, easing of import licensing, removing export restrictions, allowing foreign investment into the previously reserved sectors and full convertibility of domestic currency on foreign exchange transactions.
 The export-import policy (EXIM policy) of 1992–97 reaffirmed India’s commitment to freer trade. All import licensing lists were eliminated and a “negative” list was established. Except consumer goods, almost all capital and intermediate goods could be freely imported subject to tariffs. By April 2002, all the remaining quantitative restrictions were removed. Despite all the initial opposition to liberalization, reforms have been continued by every successive government.

Saturday, 05th Sep 2015, 11:59:35 AM

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