IMPACT OF TRADE LIBERALISATION ON ECONOMIC

DEVELOPMENT OF INDIA

Submitted to

Dr.Hanumanth yadav
(Faculty- Economics)

Submitted by:

Sakshi Dhruw

Semester: II
Roll No. 136
Section-A
B.A.-LL.B. (Hons.)

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR (C.G.)

Submitted on: FEBRUARY 15, 2016

1
 Acknowledgements

Thanks to the Almighty who gave me the strength to accomplish the project with sheer hard
work and honesty. This research venture has been made possible due to the generous co-
operation of various persons. To list them all is not practicable, even to repay them in words
is beyond the domain of my lexicon.
This project wouldnt have been possible without the help of my teacher Dr.Hanumanth
yadav, Faculty, Dept. of Sociology at HNLU, who had always been there at my side
whenever I needed some help regarding any information. She has been my mentor in the
truest sense of the term. The administration has also been kind enough to let me use their
facilities for research work. I thank them for this.

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 TABLE OF CONTENTS

Acknowledgements
Introduction......................................................................................................4
Objectives of study.......5
Research Methodology.5
review of literature................................................6
historical background...........................7
Present Scenario.....................................................................8
Steps By Government.................................................9
Challenges And Suggestions................. ...10
Conclusion............................................................................................13

Bibliography

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 Introduction

Over the past two decades, trade liberalization has become an important part of many
countries development strategies.2 Advocates of liberalization argue that opening up local
markets to foreign competition and foreign direct investment can lead to improvements in the
productivity of domestic industries, resulting in a more efficient allocation of resources and
greater overall output. Critics warn that domestic firms may not be able to realize efficiency
gains, because they are unable to successfully adapt foreign technologies to local methods of
production or because domestic firms face binding credit constraints that prevent expansion
of efficient industries as well as investments in new technology. Which of these two views is
closer to the truth has important implications for trade policy: if the latter holds, benefits of
liberalization may not be realized unless additional policies are devised to facilitate
technology transfer or ease credit constraints.
This paper examines the effects of recent trade liberalization in India using a
panel of firmlevel data. In particular, we try to
answer several questions: did Indias sweeping trade
reforms in the early 1990s lead to higher
economy-wide and firm-level productivity,
and
what was the interaction between this policy
shock and various firm and environment
characteristics? And did institutional
characteristics of the Indian states, such as financial
development, investment climate, or labor
laws play a role in the propagation of the trade liberalization shock? India is a particularly
relevant setting to seek the answers to these questions: in 1991, inresponse to a severe
balance of payments crisis, India turned to the International MonetaryFund for assistance in
solving its external payments problem. Financial assistance wasreceived from the IMF to
support Indias adjustment program, which included major structural reformsa key one
being trade liberalization. A massive overall reduction in tariffsand non-tariff barriers, as well
as a reduction in the standard deviation of protection.

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 Objectives of Study

The broad objective of the study is to study the impact of trade liberalisation on economic
development of India . The specific objectives or the interrelated objectives of the study are
as follows:

I. To study Trade reform of 1991

II. To study Effect of trade liberalisation on economic development
III. To study Role of trade policy in different sectors
IV. To analyze growth rate of Indian economy

Methodology of the Study

NATURE OF RESEARCH
This research work is descriptive and analytical in nature .It analyse the impact of trade
policy on economic development of India .

SOURCES OF DATA

Review of literature
5
 The primary focus of the report is the relationship between economic growth and
trade liberalization. A critical assessment of the literature is provided, as well as are
several empirical explorations of the relationship between international trade and
economic growth arising from that assessment.

There is stronger evidence that economic growth itself causes increases in the share of
the economy accounted for by international trade, as well as shifts in the composition
of trade away from primary products and towards more advanced manufactures;

In recent years, new techniques of simulation modeling have emerged for the
assessment of dynamic effects of trade liberalization; these techniques are particularly
well suited for exploring some of the positive linkages between trade liberalization
and economic growth.

Empirical research indicates that the most rapidly growing countries tend to have high
rates of capital investment, high rates of schooling and other types of human capital
formation, and government policies conducive to the accumulation of physical and
human capital. There is empirical evidence of a positive linkage between trade
liberalization and the rate of investment, generating an indirect linkage between trade
and growth.

Historical Background

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Liberalisation polices in India are found to be generally in tandem with the industrial policies
followed over the years. This may not be the case in many other developing countries. The
Industrial Policy of 1948 laid emphasis on heavy protection to Indian industry as it aimed at
building a strong heavy capital goods industrial base in the economy. However, faced with
low growth rate and lack of capability of the sector to be able to build a strong industrial
base, the Industrial Policy of 1956 encouraged foreign capital. It was envisaged that foreign
capital would bring better technology and lead to spill over effects on the domestic industry.
But the still sticky growth of the sector for the next two decades led to a change in the
attitudes and direction of the industrial policy and the Industrial Policy of 1980 encouraged
export-oriented industries and import of technology and raw materials. The deteriorating
balance of payments situation and the economic crisis of 1991 led to a drastic change in the
orientation of Industrial Policy of 1991, which emphasised along with other reforms,
automatic approvals for FDI in many industries, especially in export-oriented industries and
encouraged foreign technology agreements. An important step taken in the industrial policy
which affected trade was abolition of Phased Manufacturing Programmes, which were
imposed on industrial firms and required them to source their parts and components from
domestic producers rather than using imported parts and components. In line with the
industrial policy, trade policies followed a broad based liberalisation strategy. Prior to the
tariff reforms of the 1990s, the Indian tariff system was complex due to the existence of a
large number of exemption notifications applicable to all three types of duties: basic,
auxiliary and additional duty. Due to exemptions, the effective rate of duty varied widely
between very similar products. Even for the same product, the rate of customs duty applicable
varied according to user, end-use of the product and the country from which it was imported .
High tariffs rates on a large number of products and tariff peaks along with other non tariff
barriers provided high effective rate of protection (ERP) and high import coverage ratio. In
the period 1986-90, average ERP for the manufacturing sector as a whole was 125.9% while
import coverage ratio was 91.6% (Das 2003). In 1991 imports were regulated by means of a
narrow positive list of freely importable items. Items not in the positive list were either
prohibited for imports or could be imported subject to compliance with the requirements of a
complex licencing system. The overall approach to import management was selective and
geared to curtailment of non-essential and low-priority imports, with particular emphasis to
discourage inventory build-up of imported inputs through use of fiscal and monetary modes
of regulation. Although multilateral trade rules of GATT in general prohibited QRs on
importation or exportation of any product, these rules provided exceptions to this

7
fundamental principle on Balance of Payment grounds. India resorted to the BOP exception
and maintained QRs on imports on almost 80% of products, prior to the economic reforms of
1991. This edifice of regulated trade was gradually dismantled through tariff reforms and
simplification in import procedures and requirements. The reforms of 1991 brought some
major changes in the existing tariff structure. Average and weighted tariffs declined from
81.9% and 49.5% in 1990 to 57.4% and 27.8% in 1991 .The peak duty rate was lowered
gradually from > 200% in 1990 to 35% in 1999. A number of other changes were made to
simplify the system in terms of fewer rates, lower tariff differential within products and many
exemptions which related to end-use were removed. One of the most important steps
undertaken in 1992 was to shift the basis of regulating imports from a positive list of freely
importable items to a limited negative list approach in 1992. This implied that with the
exception of products listed in negative list, all other products could be freely imported.The
EXIM policy of 1992 substantially eliminated licensing and discretionary controls on trade
and provided further impetus to
exports. Apart from
consumer goods, almost all
capital goods, raw materials and
intermediate goods could be
freely imported subject only to
payment of customs duty. For
consumer goods, a major step
taken was to allow their imports
under Special Import Licence (SIL) issued to certain categories of
exporters, including deemed exporters, trading/export houses, and manufacturers who had
acquired ISO 9000 or BIS 14000 certification of quality. The special import licensees were
freely transferable.
During 1995-96 the definition of consumer goods was changed to suit the needs of importers,
so as to allow them to freely import parts, components and spares of consumer goods as well.
These were earlier restricted to the extent that these could be imported without a licence only
by actual users. Further, the list of freely importable consumer goods was expanded to
include 78 items, which included natural essential oils, instant coffee, refrigerated trucks,
cranes and other utility vehicles. By 1995 more than 3000 tariff lines covering raw materials,
intermediates and capital goods were freed of import licensing requirements, supplementary

8
licenses for all importers except small-scale industries were abolished. In 1996, 300 items
could be imported under Special Import License. Further, studies estimating the ERP and
import coverage ratios show that as compared to the 1980s, ERP declined in the decade of
1990s. It declined from 125.9% in 1986-90 to 80.2% in 1990-95 period and further to 40.4 %
in 1996-2000 while import coverage ratio declined from 96.1% in 1986-90 to 37.9% in 1990-
95 period and further to 24.8% in 1996-2000 (Das 2003).

PRESENT SCENERIO
The current trade policy reforms seem to have been guided mainly by the concerns over
globalisation of the Indian economy, improving competitiveness of its industry, and adverse
balance of payments situation. Main features of trade policies (trade reforms) since 1991 are
as follows:
1. Freer Imports and Exports:
Substantial simplification and liberalisation has been carried out in the reform period. The
tariff line wise import policy was first announced on March 31, 1996 and at that time itself
6,161 tariff lines were made free.
Till March 2000, this total had gone up to 8,066. The Exim Policy 2000-01 removed
quantitative restrictions on 714 items and the Exim Policy 2001- 02 removed quantitative
restrictions on the balance 715 items. Thus, in line with Indias commitment to the WTO,
quantitative restrictions on all import items have been withdrawn.
2. Rationalisation of Tariff Structure:
Acting on the recommendations of the Chelliah Committee, the government has, over the
years, reduced the maximum rate of duty. The 1993-94, Budget had reduced it from 110 per
cent to 85 per cent. The successive Budgets have reduced it further in stages. The peak import
duty on non-agricultural goods is now only 12.5 per cent.
3. Decanalisation:

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A large number of exports and imports used to be canalised through the public sector
agencies in India. The supplementary trade policy announced on August 13, 1991 reviewed
these canalised items and decanalised 16 export items and 20 import items. The 1992-97
policy decanalised imports of a number of items including newsprint, non-ferrous metals,
natural rubber, intermediates and raw materials for fertilisers.
However, 8 items (petroleum products, fertilisers, edible oils, cereals, etc.) were to remain
canalised. The Exim Policy, 2001-02 put 6 items under special list rice, wheat, maize,
petrol, diesel and urea. Imports of these items were to be allowed only through State trading
agencies.
4. Devaluation and Convertibility of Rupee on Current Account:
The government made a two- step downward adjustment of 18-19 per cent in the exchange
rate of the rupee on July 1 and July 3, 1991. This was followed by the introduction of
LERMS i.e., partial convertibility of rupee in 1992-93, full convertibility on the trade account
in 1993-94 and full convertibility on the current account in August 1994.
Substantial capital account liberalisation measures have also been announced. The exchange
rate of the rupee is now market-determined. Thus, exchange rate policy in India has evolved
from the rupee being pegged to a market related system (since March 1993).
5. Trading Houses:
The 1991 policy allowed export houses and trading houses to import a wide range of items.
The government also permitted the setting up of trading houses with 51 per cent foreign
equity for the purpose of promoting exports.
The 1994-95 policy introduced a new category of trading houses called Super Star Trading
Houses. These houses are entitled to membership of apex consultative bodies concerned with
trade policy and promotion, representation in important business delegations, special
permission for overseas trading and special import licences at enhanced rate.

6. Special Economic Zones:

A scheme for setting up Special Economic Zones (SEZs) in the country to promote exports
was announced by the government in the Export and Import Policy of March 31, 2000. The
SEZs are to provide an internationally competitive and hassle-free environment for exports
and are expected to give a boost to the countrys exports.

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The Policy has provided provisions for setting up SEZs in the public sector, joint sector or by
State governments. It was also announced that some of the existing Export Processing Zones
(EPZs) would be converted into Special Economic Zones.
Some of the distinctive features of SEZ scheme are:
(i) a designated duty-free enclave to be treated as foreign territory for trade operations and
duties and tariffs;
(ii) SEZ units could be for manufacturing services;
(iii) No routine examination of export and import cargo by customs;
(iv) Sale in domestic market on full duty and import policy in force;
(v) SEZ units to be positive net foreign exchange earners in three years; (vi) no fixed wastage
norms;
(vii) Duty-free goods to be utilised within the approval period of 5 years;
(viii) Subcontracting of part of production and production process allowed for all sectors,
including jewellery units;
(ix) 100 per cent foreign direct investment through automatic route in the manufacturing
sector;
(x) 100 per cent income tax exemption for 5 years and 50 per cent for 2 years thereafter and
50 per cent of the ploughed back profit for the next 3 years;
(xi) External commercial borrowing through automatic route, etc.
7. EOU Scheme:
The Export Oriented Units (EOUs) scheme introduced in early 1981 is complementary to the
SEZ scheme. It offers a wide option in locations with reference to factors like source of raw
materials, ports of export, hinterland facilities, and availability of technological skills,
existence of an industrial base and the need for a larger area of land for the project. The
EOUs have put up their own infrastructure.
8. Agriculture Export Zones:
The Exim Policy 2001 introduced the concept of Agri- Export Zones (AEZs) to give primacy
to promotion of agricultural exports and
effect a reorganisation of our export
efforts on the basis of specific
products and specific
geographical areas.
The scheme is centered on the
cluster approach of identifying
the potential products, the
geographical region in which
these products are grown and
adopting an end-to-end

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approach of integrating the entire process right from the stage of production till it reaches the
market.
The AEZs would have the state-of-the-art services such as pre-post harvest treatment and
operations, plant protection, processing, packaging, storage and related research and
development. The exporters in these zones can avail of the various export promotion schemes
under the Exim Policy including recognition as a status holder.

9. Market Access Initiative Scheme:

Market Access Initiative Scheme was launched in 2001- 02 for undertaking marketing
promotion efforts abroad. The key features of the scheme are in- depth market studies for
select products in chosen countries to generate data for promotion of exports from India,
assist in promotion of India, Indian products and Indian brands in the international market by
display through showrooms and warehouses set up in rental premises by identified exporters,
display in identified leading departmental stores total exhibitions trade fairs, etc. The scheme
shall also assist quality upgradation of products as per requirements of overseas markets,
intensive publicity campaigns, etc.
10. Focus on Service Exports:
The amended Export-Import Policy, 2002-07, announced on March 31, 2003, specifically
emphasized service exports as an engine of growth. It, accordingly, announced a number of
measures for the promotion of exports of services. For instance, import of consumables,
office and professional equipment, spares and furniture upto 10 per cent of the average
foreign exchange export earning has been allowed.
The advance licence system has been extended to the tourism sector. Under this, firms will be
allowed duty-free import of consumables and spares upto 5 per cent of their average foreign
exchange earnings of the previous three years, subject to actual user condition.
11. Concessions and Exemptions:
A large number of tax benefits and exemptions have been granted during the 1990s to
liberalise imports and promote exports with the five year Exim Policy 1992-97 and Exim
Policy 1997-2002 serving as the basis for such concessions.
These policies, in turn, have been reviewed and modified on an annual basis in the Exim
policies announced every year. Successive annual Union Budgets have also extended a
number of tax benefits and exemptions to the exporters.
These include reduction in the peak rate of customs duty to 15 per cent; significant reduction
in duty rates for critical inputs for the Information Technology sector, which is an important
export sector; grant of concessions for building infrastructure by way of 10-years tax holiday
to the developers of SEZs;
Facilities and tax benefits to exporters of goods and merchandise; reduction in the customs
duty on specified equipment for ports and airports to 10 per cent to encourage the
development of world class infrastructure facilities, etc.

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A number of tax benefits have also been announced for the three integral parts of the
convergence revolution the Information Technology sector, the Telecommunication sector,
and the Entertainment industry.

THE CASE OF INDIA: THE 1991 REFORMS

Indias post-independence development strategy was one of national self-sufficiency, and

stressed the importance of government regulation of the economy. Cerra et al. (2000, p. 3)
characterized it as both inward looking and highly interventionist, consisting of import
protection, complex industrial licensing requirements, pervasive government intervention in
financial intermediation and substantial public ownership of heavy industry. In particular,
Indias trade regime was amongst the most restrictive in Asia, characterized by high nominal
tariffs and pervasive non-tariff barriers, including a complex import licensing system, an
3 Indias trade policy is developed according to fiveyear plans. While these plans may be
modified during the implementation phase, they are by and large carried out.actual user
policy that restricted imports by intermediaries, restrictions of certain exports and imports to
the public sector (canalization), phased manufacturing programs that mandated progressive
import substitution, and government purchase preferences for domestic producers.
It was only during the second half of the 1980s, when the focus of Indias development
strategy gradually shifted toward export-led growth that the process of liberalization began.
Import and industrial licensing were eased, and tariffs replaced some quantitative restrictions,
although even as late as 1990 a mere 12 percent of manufactured products could be imported
under an open general license; still, the average tariff was more than 90 percent. (Cerra et al.

13
(2000)).However, concurrent with the gradual liberalization in the mid to late 1980s was a
rise in macroeconomic imbalancesnamely fiscal and balance of payments deficitswhich
increased Indias vulnerability to shocks. The sudden increase in oil prices, resulting from the
conflict in the Middle East in 1990, the drop in remittances from Indian workers in the same
region, and the slackened demand of important trading partners, as well as political
uncertainty, undermined investor confidence and resulted in large capital outflows. To deal
with its external payments problems, the government of India requested a
Stand-By
Arrangement from the IMF in August
1991. The IMF support was conditional
on an
adjustment program featuring
macroeconomic stabilization and
structural reforms. The latter
focused on the industrial and import
licenses, the financial sector, the tax
system, and trade
policy. On trade policy, benchmarks for the first review of the Stand-By Arrangement
included a reduction in the level and dispersion of tariffs, a removal of quantitative
restrictions on imported inputs and capital goods for export production, and elimination of
public sector monopoly on imports of all items except petroleum, edible oils, and fertilizer
and certain items canalized for health and security reasons (Chopra et al. (1995). The
governments export-import policy plan (199297) ushered in radical changes to the trade
regime by sharply reducing the role of the import and export control system .The share of
products subject to quantitative restrictions decreased from 87 percent in 1987/88 to 45
percent in 1994/95. All 26 import licensing lists were eliminated and a negative list was
established. Restrictions on exports were also relaxed, with the number of restricted items
falling from 439 in March 1990 to 210 in March 1994. notes that given several earlier
attempts to avoid IMF loans and the associated conditionalities, the large number of members
of the new cabinet who had been cabinet members in past government with inward-looking
trade policies and the heavy reliance on tariffs as a source of revenues, these reforms came as
a surprise. In addition to easing import and export restrictions, tariffs were drastically
reduced.Average tariffs fell from more than 80 percent in 1990 to 37 percent in 1996, and the
standard deviation of tariffs dropped by 50 percent during the same period presents the

14
evolution of tariffs in selected industries. Most industries faced a sharp drop in tariffs from
1991 to 1992, although the magnitude of the shock varied widely by industry. The Indian
rupee was also devalued by 20 percent against the U.S. dollar in July 1991, and further
devalued in February 1992.5 Subsequently, it became fully convertible for current
account transactions. The economy reacted positively to the reduction in trade distortions
and, as a result, the ratio of total trade to GDP rose from an average of 13 percent in the
1980s to nearly 19 percent of GDP in 1999/00.Export and import volumes also increased
sharply from the early 1990s, outpacing growth in real output

The Indian Trade Liberalization

Indias post-independence development strategy was one of national self-sufficiency, and

stressed the importance of government regulation of the economy. characterized it as both
inward looking and highly interventionist, consisting of import protection, complex industrial
licensing requirements, pervasive government intervention in financial intermediation and
substantial public ownership of heavy industry. In particular, Indias trade regime was
amongst the most restrictive in Asia, with high nominal tariffs and non-tariff barriers,
including a complex import licensing system, an actual user policy that restricted imports
by intermediaries, restrictions of certain exports and imports to the public sector , phased
manufacturing programs that mandated progressive import substitution, and government
purchase preferences for domestic producers. It was only during the second half of the 1980s,
when the focus of Indias development strategy gradually shifted toward export led growth,
that the process of liberalization began. Import and industrial licensing were eased, and tariffs
replaced some quantitative restrictions, although even as late as 1989/90 a mere 12 percent of
manufactured products could be imported under an open general license; the average tariff
was still one of the highest, greater than 90 percent. However, the gradual liberalization of
the late 1980s was accompanied by a rise in macroeconomic imbalancesnamely fiscal and
balance of payments deficits which increased Indias vulnerability to shocks. The sudden
increase in oil prices due to the Gulf War in 1990, the drop in remittances from Indian
workers in the Middle East, and the slackened demand of important trading partners
exacerbated the situation. Political uncertainty, which peaked in 1990 and 1991 after the poor

15
performance and subsequent fall of a coalition government led by the second largest party
(Janata Dal) and the assassination of Rajiv Gandhi, the chairman of the Congress Party,
undermined investor confidence. With Indias downgraded credit-rating, commercial bank
loans were hard to obtain, credit lines were not renewed and capital outflows began to take
place. To deal with its external payments problems, the government of India requested a
stand-by arrangement from the International Monetary Fund (IMF) in August 1991. The IMF
support was conditional on an adjustment program featuring macroeconomic stabilization and
structural reforms. The latter focused on the industrial and import licenses, the financial
sector, the tax nsystem, and trade policy. On trade policy, benchmarks for the first review of
the Stand-By Arrangement included a reduction in the level and dispersion of tariffs and a
removal of a large number of quantitative restrictions (Chopra et al., 1995). Specific policy
actions in a number of areas notably industrial deregulation, trade policy and public
enterprise reforms, and some aspects of financial sector reform also formed the basis for
aWorld Bank Structural Adjustment Loan, as well as sector loans. The governments export-
import policy plan (1992-97) ushered in radical changes to the trade regime by sharply
reducing the role of the import and export control system. The share of products subject to
quantitative restrictions decreased from 87 percent in 1987/88 to 45 percent in 1994/95. The
actual user condition on imports was discontinued. All 26 import licensing lists were
eliminated and a negative list Thus, apart from goods in the negative list, all goods could be
freely imported . In addition to easing import and export restrictions, tariffs were drastically
reduced .Average tariffs fell from more than 80 percent in 1990 to 37 percent in 1996, and the
standard deviation of tariffs dropped by 50 percent during the same period. the strikingly
linear relationship between the pre-reform tariff levels and the decline in tariffs the industry
experienced. This graph reflects the guidelines according to which tariff reform took place,4
namely reduction in the general level of tariffs, reduction of the spread or dispersion of tariff
rates, simplification of the tariff system and rationalization of tariff rates, along with the
abolition of numerous exemptions and concessions. Agricultural products, with the exception
of cereals and oil seeds, faced an equally sharp drop in tariffs, though the non-tariff barriers
of these products were lifted only in the late 1990s There were some differences in the
magnitude of tariff changes (and especially NTBs) according to industry use type: i.e.
Consumer Durables, Consumer Nondurables, Capital goods, Intermediate and Basic goods .
Indian authorities first liberalized Capital goods, Basic and
Intermediates, while Consumer Nondurables and agricultural products were slowly moved
from the negative list to the list of freely importable goods only in the second half of the

16
1990s. The Indian Rupee was devalued 20 percent against the dollar in July 1991 and further
devalued in February 1992. By 1993, India had adopted a flexible exchange rate regime
(Ahluwalia, 1999).
Following the reduction in trade distortions, the ratio of total trade in manufactures to
GDP rose from an average of 13 percent in the 1980s to nearly 19 percent of GDP in 1999/00
Export and import volumes also increased sharply from the early 1990s, outpacing growth in
real output .Indias imports were significantly more skilled-labor intensive than Indias
exports and remained so throughout the 1990s, as shown in Figure 3 which plots cumulative
export and import shares by skill intensity in 1987, 1991, 1994 and 1997. India remained
committed to further trade liberalization, and since 1997 there have been further adjustments
to import tariffs. However, at the time the government announced the export-import policy in
the Ninth Plan (1997-2002), the sweeping reforms outlined in the previous plan had been
undertaken and pressure for further reforms from external sources had abated.

LIBERALISATION IMPACT UPON INDIA

Indian has been facing grave economic crisis and external pressure for foreign exchange,
while there was an internal debt trap which continued from 1986 onwards backed by severe
liquidity crisis. We were almost on the brink of defaulting international arena when
Narasimha Raos Government took over in June 1991. This must have created panic in the
minds of NRIs who took away deposits amounting to about 1.4 billion US dollars1.

The country landed in the grip of internal and external debt traps. The foreign exchange crisis
was stimulated by long-term and short-term foreign debts, short-term foreign debts when a
countrys repayments capacity is inadequate, are just like sudden death traps in relation to
economy. No more foreign borrowings were possible. The countrys monetary system,
particularly the foreign exchange situation, was in a very disastrous footing Dr. Manmohan
Singh, the then Union Finance Minister (also an economist) had a great task to introduce
ways and means for the recovery of the ailing monetary system. Changing of exchange rate
structure was, therefore, the first weapon in his hands.

1 G. S. Batra, Emerging trend in Globalisation, Liberalisation and privatization

(edited) 17-36, 2001.

17
When globalisation has become the order of the day, nations have adopted the path of
liberalisation. India could not isolate itself from this trend. It was, therefore, appropriate on
the part of Government of India to institute and implement a strategy for economic
liberalisation.

The LPG model of development which was introduced in 1991 by the then Finance Minister
Dr. Manmohan Singh with a big bang was intended to charter a new strategy with emphasis
on liberalisation, privatisation and globalisation. (LPG) Several major changes at the
domestic level were introduced. Firstly, areas hitherto reserved for the public sector were
opened to private sector.2 The Government intended to transfer the loss-making units to the
private sector, but it failed because there were no takers for them. Instead, the Government
started disinvestment of the highly profit-making PSUs and the proceeds were used to reduce
fiscal deficits. Thus, due to various social constraints the Government could not carry forward
its programme of privatization, though it did succeed in liberalizing the economy to the
private sector in both domestic and foreign areas.

Secondly, by permitting the private sector to set up individual units without taking a licence,
the Government removed certain shackles which were holding back or delaying the process
of private investment.

Thirdly, by abolishing the threshold limit of assets in respect of MRTP companies and
dominant undertakings, the Government freed the business houses to undertake investment
without any ceiling being prescribed by the MRTP Commission. Obviously, considerations of
promoting growth were more dominant with the Government and such issues as
concentration of economic power were assigned a back seat.

Fourthly, with a view to facilitate direct foreign investment, the Government decided to grant
approval for direct foreign investment upto 51 percent in high priority areas. The Government
could also consider proposals involving more than 51 percent equity, but such proposals
would require prior clearance of the Government. No permission was required for hiring
foreign technicians, foreign testing of indigenously developed technologies, etc. 3

2 Economec Reforms in India Lessons from current Experience Southern

Economist vol, 44, No.4, July 1, 2005

3 Datt Ruddar and Sundharam K.P.S., Indian Economy, S, Chand and Company
Ltd. New Delhi 2008

18
Fifthly, chronically sick public sector enterprises were referred to the Board for Industrial and
Financial Reconstruction (BIFR) for the formulation of revival/ rehabilitation schemes. A
social security mechanism was introduced to protect the interests of workers likely to be
affected by such rehabilitation packages.

Sixthly, to improve the performance of public sector enterprises, greater autonomy was given
to PSU managements and the Boards of public sector companies were made more
professional. Lastly, the economy was opened to other countries to encourage more exports.
To facilitate the import, of foreign capital and technology and other allied imports, reduction
in import duties and other barriers were brought about. LPG Model of development
emphasises a bigger role for the private sector. It envisages a much larger quantum of foreign
direct investment to supplement our growth process. It aims at a strategy of export led growth
as against import substitution practised earlier, It aims at reducing the role of the State
significantly and thus abandons planning fundamentalism in favour of a more liberal and
market driven pattern of development. Critics have pointed out certain fundamental
weaknesses of the LPG Model of Development.

Indian economy is a dynamic economy that is showing tremendous potential of growth.

Globalization, liberalization and privatization are the key strategic mandates for economic
policies.

Market oriented reforms are sustainable and are gaining acceptance with resistance to
privatization going down due to the benefits like enhanced efficiency through target oriented
management and disposition of public funds into social and physical infrastructure of the
country. Privatization has shown great outcomes in the development of sectors like banking,
insurance, telecom, power, civil aviation etc. However, the lobbying in domestic circuits was
enfeebled by the surprising reversal of the Indian economy in present time. Indian economy
registered an average growth of 8.5 per cent in the past four years and it is evidence enough
to highlight the potential of privatization and its need and likelihoods of privatization.

However, it is disheartening to acknowledge that India is not a very alluring destination for
foreign investors. Bureaucracy, red tapism, political hiccups, corruption are also prominent
hindrances in the development of India that offers ample of skilled and cheap labor and
inadequate capital. In spite of all the hurdles, it is a viable to expect higher rate of returns as
compared to capital intensive industrialized countries. With more liberal reforms in the
making, future of privatization seems to be bright and a salubrious flow of foreign investment

19
and even development of domestic private players to take charge of the struggling PSUs and
turn them around.4

Over the time, Indian policy makers have shed their inhibitions about privatization and have
formulated liberal reforms to divest the huge capital investment in PSUs and enhance the
efficiency and profit generation of the state owned enterprises. Sectors that showed
tremendous success after privatization are insurance, banking, civil aviation, telecom, power
etc. However, complete privatization is still a far-fetched dream. In most of the liberalized
sectors, government control is still evident and there is more of delegation or joint ventures
between public and private sector are functional like Maruti Suzuki etc.

PRODUCTIVITY GROWTH IN
AGRICULTURAL SET UP

Trade liberalisation affecting Indian agriculture began in the early 1990s, with the progressive
reduction or removal of trade restrictions of various types. The rupee devaluation of mid
1991 was followed by the removal of export subsidies on agricultural commodities such as
tea and coffee, and subsequent reduction of various other export subsidies. The process
accelerated from the late 1990s, in tune with WTO agreements, and involved liberalisation of
export controls, liberalisation of quantitative controls on imports and decontrol of domestic
trade. Quantitative restrictions on imports and export restrictions on groundnut oil,
agricultural seeds, wheat and wheat products, butter, rice and pulses, were all removed from
April 2000. Almost all agricultural products are now allowed to be freely exported as per
current trade policy.5

4 Young, R., 2005. On Privatization- Competitive Sourcing in State Government,

IPSPR E Journal, May 2005: Institute of Public Service and Policy Research,
University of South Carolina.

20
This has been associated not only with the removal of quota control on imports, but the
reduction of import tariffs, except in certain cases (such as soya bean) where the tariff levels
have reached the bound levels. In any case, the optimism surrounding the signing of the
Uruguay Round agreement was such that for a range of important agricultural commodities,
including rice wheat and oilseeds, the Indian trade negotiators had declared zero rates of tariff
binding. After world trade prices of various crops started crashing from 1996 onwards, the
Government of India was forced to renegotiate the bound tariff levels for as many as 15
agricultural items.

This meant that even as the uncertainties related to international price movements became
more directly significant for farmers, progressive trade liberalisation and tariff reduction in
these commodities made their market relations more problematic. Government policy did not
adjust in ways that would make the transition easier or less volatile even in price terms. Thus,
there was no evidence of any co-ordination between domestic price policy and the policies
regarding external trade and tariffs. For example, an automatic and transparent policy of
variable tariffs on both agricultural imports and exports linked to the deviation of spot
international prices from their long-run desired domestic trends, would have been extremely
useful at least in protecting farmers from sudden surges of low-priced imports, and
consumers from export price surges. Such a policy would prevent delayed reactions to
international price changes which allow unncessarily large private imports. It would therefore
have allowed for some degree of price stability for both producers and consumers, which is
important specially in dominantly rural economies like that of India.

In the absence of such minimal protection, Indian farmers had to operate in a highly uncertain
and volatile international environment, effectively competing against highly subsidised large
producers in the developed countries, whose average level of subsidy amounted to many
times the total domestic cost of production for many crops. Also, the volatility of such prices
for example in cotton has created uncertain and often misleading signals for farmers who
respond by changing cropping patterns. It has directly affected cultivators of oilseeds such as
soya bean and groundnut farmers due to palm oil imports. While there has been some
diversification in crop production, the downside of this has been the reduction of production
of traditional staple foodgrains and declining food consumption in rural areas.6

5 Patnaik, Utsa (2004) The republic of hunger, available on www.macroscan.org

21
Meanwhile, other government policies had direct and indirect effects upon agriculture. The
most significant related to the efforts at reducing subsidies which affected both agricultural
producers and consumers, and the reduction of public expenditure which would have
benefited cultivation. Thus, both food and fertiliser subsidies were sought to be reduced over
this period. However, both of these strategies, which involved raising the prices for
consumers of both food and fertilisers, had undesirable and even counter-productive effects,
leading to the paradoxical results of reducing consumption and simultaneously increasing
subsidies!

In consequence, domestic support to Indian farmers was sharply negative through the 1990s
for most crops, and negligible in non-crop-specific terms.

The impact of trade liberalisation on farmers welfare works through various channels such as
volatile prices, problems in imports and exports, impact on livelihood and other employment
opportunities, etc. For farmers, perhaps the single most adverse effect has been the
combination of low prices and output volatility for cash crops. While output volatility
increased especially with new seeds and other inputs, the prices of most non-foodgrain crops
weakened, and some prices, such as those of cotton and oilseeds, plummeted for prolonged
periods. This reflected not only domestic demand conditions but also the growing role played
by international prices consequent upon greater integration with world markets in this sector.
These features in turn were associated with growing material distress among cultivators. 7

In a closed economy, lower output is normally accompanied by some price increase.

Therefore, coincidence of lower production with lower terms of trade was very rare until
recently. The pattern of lower prices accompanying relatively lower output reflected the
effect of the growing integration of Indian agriculture with world markets, resulting from
trade liberalisation. As both exports and imports of agricultural products were progressively
freed, international price movements were more closely reflected in domestic trends. The
stagnation or decline in the international prices of many agricultural commodities from 1996
onwards meant that their prices in India also fell, despite local declines in production. This

6 Mathur, Archana S and Arvinder S. Sachdeva (2005) Customs tariff structure

in India, Economics and Political Weekly, February 5.

7 http://www.cesmadrid.es/documentos/sem200601_m d02_in.pdf [Accessed 27

December 2012]

22
was not always because of actual imports into the country: the point about openness is that
the possibility of imports or exports can be enough to affect domestic prices at the margin. 8

Steps By The Government

Liberalisation measures undertaken by the Government of India are:

(i) Exemption of industries from licensing:

The government exempted all industries (except for alcohol, cigarettes, hazardous chemicals,
explosives, electronic aerospace and drugs) from any kind of industrial licensing.

(ii) Expansion of Industries:

Industries are free to expand themselves according to the needs of market. Even government
approval is not required. Ceiling for capital has also been abolished.

(iii) Freedom of Production:

8 Raghunathan, V., 2006. Leave Behind the Monopoly Mindset, Times of India,
February 17, 2006.

23
According to the new economic policy producers are free to produce goods of their choice

(iv) Going away with the concept of MRTP:

Now, there are no 'MRTP companies. These companies can take their own investment
decision and expansion plans.

(v) Extending Investment Limit of Small Industries:

According to the new policy investment limit of small scale industries have been increased to
one crore, so that they may modernise these industries.

(vi) Inviting Direct Foreign Investment:

The Indian companies can invite the foreign investors to invest in their industries which has
further enlarged and expanded many Indian industries.

Challenges And Suggestions

CONCLUSION

BIBLIOGRAPHY

24
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