A R V I N D P a N a G a R I Y a India's Trade Reform

A developing countries, India’s growth experience during the past five decades has been unique. Unlike many of its East and Southeast Asian neighbors, India did not grow at “miracle” rates that exceeded 6 percent and reached as high as 10 percent. Nor, unlike Africa and Latin America, did it suffer periods of prolonged stagnation or decline. For three of the five decades (1950–80), India’s economy grew steadily at the so-called Hindu rate of 3⁄2 percent a year in real terms, and during the next two decades it grew at annual rates between 5 and 6 percent. Although the credit for this steady growth without prolonged stagnation or decline goes to the macroeconomic stability and policy credibility that the government provided, the blame for the relatively low rate of growth, especially during 1950–80, must be assigned to the myriad microeconomic distortions and heavy state intervention that straitjacketed India’s entrepreneurs. The government effectively stamped out domestic competition through strict investment licensing and eliminated foreign competition through strict import licensing. It was only during the second half of the 1980s that the government began to loosen its grip on investment and import licensing; this was followed by a more systematic and comprehensive opening up in the 1990s and after. This paper discusses India’s external sector policies, focusing especially on the past two decades; the impact of these policies on trade flows, efficiency, and growth; and the future direction trade policies must take. It begins with a discussion of the major policy developments in trade in both goods and services. This is followed by a discussion of the evolution of trade flows—their growth, composition, and direction. The next section describes the impact of trade liberalization on efficiency and growth.