Academic journal article Journal of International Affairs

India: A New Tiger on the Block?

Academic journal article Journal of International Affairs

India: A New Tiger on the Block?

Article excerpt

After three decades of inward-oriented development, India has made a decisive switch in its trade and foreign investment policies. Beginning in July 1991, the country systematically liberalized its economy. Though the pace of the reform may appear gradual to observers of Eastern Europe, the changes of the last three years evoke disbelief when viewed in the context of India's own past. Prior to 1991, a complex maze of quantitative restrictions, foreign-exchange controls and tariff rates averaging well over 120 percent (and rising as high as 400 percent) characterized trade policy. Today, virtually all import quotas except those on consumer goods and a few intermediate inputs and capital goods are gone, the rupee is convertible on the current account, and tariff rates are capped at 65 percent. Equally important, the P.V. Narasimha Rao government shows no signs of looking back, the government has continued on its progressive track presenting major changes with every budget since the beginning of the reform program.

India is not only the most populated democracy in the world, it is also one of the few developing countries that has functioned as a true democracy for more than four decades. This fact makes India's experience with economic reform unique. Unlike authoritarian states, a democratic government must mobilize public opinion in favor of new policies. Major policy changes face formidable challenges from entrenched interests even in advanced democracies such as the United States, as was demonstrated during the fierce debate on the North American Free Trade Agreement. In India, a developing country, this challenge from entrenched interests is even bigger and was partially responsible for the delay in the implementation of major reforms.

The central purpose of this paper is to analyze India's trade reform in the last three years. I look at all the major changes that have occurred, study their impact, evaluate the management of the reform and make suggestions for future policy changes. In pursuit of the last objective, I draw upon the recent experience of China.

A full understanding of the current reform process requires the knowledge of past trade policies and the policy regime the Rao government inherited. Therefore, in section one, the paper reviews the evolution of trade policy up to June 1991. In section two, I describe trade reforms undertaken since July 1991. A few of these reforms were made only recently, in February 1994 with the 1994-95 budget and in March 1994 with annual modifications to the Export-Import Policy 1992-97. The third section assesses the impact of the reform, particularly the impact on public opinion. The fourth section evaluates critically the management of reform, and asks questions such as whether the pace of the reform is too slow and whether the exchange rate has been satisfactorily managed. Finally, I offer suggestions for future trade reforms.

It should be noted at the outset that policy changes introduced in the last three years extend far beyond the external sector. The scope of this paper, however, is limited to the external sector. The paper refers to domestic regulatory controls only when they bear on foreign trade.(2)

EVOLUTION OF THE CONTROLLED REGIME(3)

Several factors combined to create and perpetuate the complex regime of import controls inherited by the present government. First, when India initiated its development program in the 1950s, the Soviet Union was regarded as a success story and the model to follow. Based on that experience, economists and policy makers were nearly unanimous in their opinion that, in a poor country, planning was essential to allocate the economy's resources efficiently. Without much hesitation, India chose the path of planned development. Although this strategy did help catalyze the process of growth in the long run, it also created an economic machinery and developed a mindset that were naturally receptive to controls. …

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