n his first Budget Speech on July 24, 1991, then Finance Minister Manmohan Singh effectively laid the foundations of India’s trade and investment liberalization agenda. Providing a strong rationale for the government’s decision to embrace an open-door policy, Singh argued, “time has come to expose Indian industry to competition from abroad in a phased manner”.
For the PV Narasimha Rao government, ushering in the policy of trade liberalization was clearly one of its priorities. Within a month of its taking over, the Finance Minister announced in Parliament that the government had “introduced changes in import-export policy, aimed at a reduction of import licensing, vigorous export promotion and optimal import compression”.
The pathway chosen by the government had its strong advocates. In an oft-quoted paper, Michael Lipton and Jeffrey Sachs had argued that free trade instantly brings to bear on domestic firms the competition of the rest of the world, which almost resonated with Singh’s arguments. Lipton-Sachs’ advice was for the adoption of open-door policies at one stroke, euphemistically called the ‘big bang approach. Strong support for such policies was also extended by the World Bank, which spoke of the merits of phasing out quantitative restrictions rapidly and reducing tariffs to reasonably low and uniform levels, such as a range of 15-25 percent. Further, the World Bank favored.
The Government of India undertook trade liberalization through steep reductions in tariffs. Thus, India’s simple average of import tariffs was reduced from nearly 82 percent in 1990 to 56 percent in 1992, while its trade-weighted tariffs came down from nearly 50 percent to 28 percent. The Tax Reforms Committee headed by Raja Chelliah established in 1991 to draw up a roadmap for reducing import tariffs, proposed that the trade-weighted import tariffs should be reduced to 25 percent by 1995-96, from nearly 50 percent in 1990, which was consistent with the World Bank target.
Interestingly, the government went beyond this target, reducing average trade-weighted tariffs to 23.6 percent in 1996, with the simple average of tariffs at 38.7 percent.
The process of reduction of import tariffs came to a near standstill in the second half of the 1990s. By 2000, the average of trade-weighted tariffs remained at the level of 1996, while the simple average tariffs declined marginally to 33.7 percent. In 1997, the then Finance Minister, P Chidambaram, tried to provide momentum to the trade liberalization agenda by announcing that by the turn of the millennium India’s average tariffs would be brought down to single digits tariffs, comparable to those adopted by the ASEAN members.
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India’s average import tariffs did not decline to single digits immediately, but the United Front government did take an important step towards lowering tariffs. This it did by signing on to the Information Technology Agreement of the World Trade Organization (WTO) and agreeing to eliminate tariffs on a range of electronic products from the turn of the millennium.
India’s trade liberalization pathway was never a smooth affair as tariffs could not be lowered for several important manufacturing industries such as automobiles, and, of course, agriculture. In the Doha Round negotiations in the WTO, India adopted an agnostic view regarding trade liberalization.
Importantly, successive Union governments, irrespective of their political affiliations, have held this view in the multilateral trade negotiations. At the same time, however, they have engaged in negotiating free trade agreements (FTAs) in their efforts to forge strategic partnerships. But in recent years, the officialdom has questioned these agreements, suggesting that trade liberalization via FTAs has not favored India.
Why has India emerged as a reluctant liberalizer after its enthusiastic endorsement of trade liberalization three decades back?
The answer is the lack of competitiveness of Indian enterprises in the global markets. Singh spoke of the need to increase the efficiency and international competitiveness of industrial production of domestic entities, as did his successors, but there was little government support that was crucial for realizing this objective.
Thus, while India’s policymakers aspired to make the economy as open as those in the ASEAN region, they ignored the fact that proactive governments in these countries lent consistent support to a slew of efforts for strengthening their manufacturing sectors. Critical investments in both physical and human infrastructure and building vibrant innovation systems were among the more significant of these.
Under Singh’s prime ministership, attention was paid for the first time to find ways for improving the dismal state of India’s manufacturing. However, during the period since, strengthening the sinews of the manufacturing sector has not got the expected fillip.