Home YoungThinkers Liberalisation, Protectionism And India – The Story Retold

Liberalisation, Protectionism And India – The Story Retold

by Gokul Sundararaghavan
Published: Last Updated on 580 views

India is, at the moment, an emerging superpower. Among Asian economies, in terms of GDP, it is only behind China and Japan and the fifth largest economy in the world behind Germany. In this article, we will examine four questions – 

Firstly, what are the reasons behind India’s fast economic growth? 

Secondly, what strategy has India adopted with regards to its economic diplomacy? 

Thirdly, what is its global standing in international trade? 

Fourthly, what could be the way forward? 

Why India has grown fast

Post the liberalisation reforms of the 1990s, India’s manufacturing sector saw a substantial decline and its contribution to the GDP declined. The economy shifted from manufacturing to service sector. Interestingly, a similar shift was observed in the pre-liberalisation era when the concentration of agricultural activity moved towards manufacturing.  

However, employment in the service sector has not been rising at the same rate as observed in the previous shift. As noted in the financial year 2019-20, the service sector contributed well above 50% to the GDP whereas manufacturing failed to touch 30%. But when it came to employment patterns, service sector only contributed around 31%, which is a matter of rising concern. 

During the 1990s, reform-based policies were introduced with the aim of increasing employment. A letter by the Ministry of Finance stated that they had aimed at bringing out “rapid growth in income and reduction of unemployment”. Their decision was successful because as regulations relaxed, the country saw an increase in investment in various sectors, like agriculture, industry and so on. Things further improved when the fiscal deficits came down from 8.4% of the GDP to around 6.5% in the next year.

This was followed by instituting major tax reforms, curbing conspicuous consumption and disinvestment of government’s equity holdings in select areas of the public sector among many policies, which paid good dividends. Hence, it would be fair to say that the reforms made back in the years of liberalisation were the reason for strong economic development. Let us take a closer look at what transpired. 

The first amongst many reforms were related to the Industrial policy of the country, aimed at achieving immediate deregulation of most sectors. The MRTP (Monopolies and Restrictive Trade Practices) was amended to bypass the need for prior permission from the government for capacity building. 

While the policy had both negative and a positive side, India mostly stood to gain from it. 

The areas of business that were earlier reserved for public sector were brought down to eight from an intrusive seventeen. The eight that remained belonged to sectors of fundamental needs, such as security and strategic importance (atomic energy industry and so on). This was one of the bigger steps in enhancing Industrial growth. 

Along with other reforms, in the monetary and financial sector, Interest Rate Liberalisation Policies were also introduced. They were carried out on a long-term basis to shift the control of the rates determined by the RBI and transition them into deregulation, eventually leading to liberalisation. This policy supplemented the industrial reforms and ultimately developed the Industrial sector. 

India’s economic diplomacy strategy 

Indian economic diplomacy and positioning in international trade is very interesting. In view of the nation’s growth from a country that had just been liberated, to a developing nation and to one of the more developed economies of the world, Indian policy on international trade (commercial diplomacy and investment diplomacy) has passed through multiple phases. 

In the 1970s, developing countries had been deeply affected by the wounds of colonialism, not just politically, but also economically. The International Monetary Fund and World Bank had used post-war recovery in a way that benefitted industrial powers of the time, when unearthing resources was key. The global competition of owning the most resources was perhaps at its most competitive state, and this competition was held at the expense of small, poor countries. 

These countries voiced out their demands in the ‘new international economic order’ for control over their own resources, policies that favoured them, and independence from the politics of the developed countries among others. India’s stance on the NIEO is worth examining. 

Back then, India was leading the non-alignment movement and was pressing for the principles of non-interference. In the Algiers conference, a common economic stance was agreed to and India favoured protectionism for key sectors such as agriculture and defence, and spoke against tariffs on developing countries, which had also been the ultimate goal of the Kennedy Round of Negotiations session of General Agreement on Tariffs and Trade (GATT) between 1964-67 in Geneva. 

Hence, the early stages of the Indian economic policy was in line with the non-alignment ideology, which was removal of tariffs on developing countries, protection of their own economic interests and control over produce, with good returns. 

Even in the developmental stage of the Indian economy, the government maintained a similar stance. Progressively after that, in essence, it has been against the concepts of protectionism, and has sought to establish itself as an economic stronghold. In light of trade diplomacy and economic diplomacy of our country, two key aspects of the 1991 reforms have to be taken note of – 

Firstly, trade policy reforms – the policy gave room for three major and important decisions in the trade department: There were freer import and export of goods (Indian protectionism removed); the tariff structure was rationalised and qualitative restrictions removed; the scope of items being imported and exported by trading houses were broadened. 

Secondly, FDI reforms, where a Foreign Investment Promotion Board was set up – the limit for foreign equity was raised and so was granting permission for various high technology industries. 

The government also decided to devalue the Rupee. 

How these policies affected India 

Let us examine the effects of monetary devaluation first. In all conditions, monetary devaluation allows for, and resulted in, a rise in exports. This was again, in line with the Kennedy conference. The FDI policy reforms to promote foreign integration and foreign direct investment had a positive effect on growth and expansion of industries in India. Each policy complemented the other. 

Currently, India wants to improve its free trade, and function as an integral part of the Asia Pacific Bridge. This is understood clearly as India is pushing to join the APEC while signing bilateral deals with many countries. The possible implementation of the Trans Pacific Partnership is something that India should watch out for, considering that, the implementation of the TPP will increasingly distance India from the flow of goods through the Asian continent, and even more so from the global supply chain. Furthermore, India is one among the active members of the Indo-Pacific Business Forum which met on 4 November 2019 to promote high value investment among other things. 

Conclusion 

In conclusion, India’s entry into the Asia Pacific Economic Cooperation is extremely necessary, and it must do everything it can to push for it. The Indian economic policy has complications, particularly due to the escalation of Indo-Sino border tensions. The Indian economic policy towards China should not be openly offensive all at once, given China’s deep integration into the global supply chain and its growing importance in the Indian economy. 

In fact, Indian imports from China are crucial to the well-being of multiple sectors. Hence, India in my opinion, should adopt measures which do not go against China aggressively in the short term, but achieve independence in the long termWe can start by taxing of Chinese companies in India and reducing the benefits offered to Chinese firms in India among other solutions. Such measures should be implemented before slapping high tariffs in the first go itself.  

It is time that India takes its place in the world economic order as a vital region for foreign direct investment, a country offering free and consistent flow of trade, and as an economic superpower. 

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