Trade and Investment Policy Reforms

The liberalisation of the trade and investment regime was undertaken to make Indian industrial production more competitive internationally, and to attract foreign investment and technology into the economy. A related aim was to improve the efficiency of local industries and to encourage them to adopt modern technologies. In short, the idea was that exposure to world markets and foreign capital would force Indian industry to raise its game.

The protectionist regime before the reforms:

To protect its domestic industries, India had followed a regime of quantitative restrictions on imports. This protection was maintained through tight controls over what could be imported and by keeping tariffs (import duties) very high. Although these measures were meant to shield local producers, in practice they had the opposite long-run effect: shielded from competition, industries had little incentive to become efficient, and both efficiency and competitiveness suffered. This is one reason the manufacturing sector grew slowly.

What the trade policy reforms aimed to do:

The trade policy reforms had three main objectives:

1. Dismantling the quantitative restrictions on imports and exports so that the movement of goods was governed by prices and competitiveness rather than by physical quotas.
2. Reduction of tariff rates, bringing down the very high import duties that had insulated domestic producers.
3. Removal of licensing procedures for imports, so that traders no longer needed government permission for most goods.

How these aims were carried out:

• Import licensing was abolished, except in the case of hazardous and environmentally sensitive industries, where controls were kept for reasons of safety and the environment.
• Quantitative restrictions on the imports of manufactured consumer goods and agricultural products were fully removed with effect from April 2001, opening these markets to foreign goods.
• Export duties were removed in order to improve the competitive position of Indian goods in international markets, so that Indian exporters would not be handicapped by extra taxes on what they sold abroad.

Together these steps opened the Indian economy to far greater international trade, exposing domestic producers to competition while also giving them access to imported inputs, technology and foreign markets.