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Title: Trade Policy Reforms - A Case Study of Trade Liberalization in India (1990 - 2010)
Authors: Sinha, P.
Keywords: Humanities & Social Science
Issue Date: 2015
Abstract: India was one of the most trade restricted economies of the world during 1950-1990. An eccentric average level of effective protection was observed throughout the early 1960s which exceeded 200 percent in India. India continued with the import substitution (IS) strategy and advocate for the need and transitions of tariff and subsidy for exports and imports in India. There arose a need for India’s economic reforms in 1990. India’s trade policy switched hurriedly from IS to export promotion (EP) in the Eight Five Year Plan (1992-97). With this background the key concern of this thesis is to present a reflective assessment of India’s trade liberalization during 1990-2010. To fulfil these objectives some major research questions are as follow: a) How liberalized is India’s current trade policy from those of its past?, b) What are the major indications from different trade indexes?, c) Whether implementation of trade policy reform and execution is at its optimum?, d) What are the gains and the significance of trade liberalization for developing country like India?, e) What next in India: protectionism or further liberalization? The research methodology of this work encompasses analytical as well as numerical techniques. In view of both techniques the triangulation on India’s trade liberalization involves critical analysis of trade policy available in the plan documents, evaluation of various trade indexes, including Estrada’s trade liberalization evaluation (TLE), time series analysis of trade statistics and an appraisal of e-questionnaire received from trade experts to draw the final conclusion. The study finds that India adopted a regime of import restriction during 1947-52 in the backdrop of feeble industrialization. Short lived trade liberalization was adopted during 1952-1956 to support industrialization. A very restrictive import policy with an EP drive was adopted during 1956-1966. On the other hand, a vigorous EP initiative was launched. The trade policy assumed that a lasting solution to the balance of payment (BoP) problem lies in the promotion and diversification of India’s export basket. It was in this period that India’s trade policy was thoroughly reviewed by the Mudaliar committee. The Sixth Five Year Plan (1980-85) re-adopted a mix of IS and EP as a prime model of trade. Balancing BoP and increasing national income was the main thrust of the IS strategy. The management of the BoP during the seventh plan and beyond called for a realistic multi-dimensional approach such as EP, import liberalization, technological upgradation in production. By the end of 1991, India failed to develop a viable policy for the management of BoP. Ever since 1956-57, except for a few years the BoP problems have merely varied in its intensity. India started moderate trade liberalization from 1991. The 150 items out of 542 items of restricted list shifted to special import license (SIL) list and remaining 392 items shifted to open general license (OGL) list. India’s simple average of total nominal import tariff rates decreased from 128 percent in 1991 to 11.8 percent in 2010. As a result trade grew at a rate of 10 per cent per annum during the Eighth Five Year Plan (1992-97). As an outcome of these reforms, India was labelled as a New India by leading economists. It was in this New India that auto components, information technology enabled services (ITES), software, fine chemicals and pharmaceuticals were added as the new points in India’s growing competition. Despite of these reforms, India is still being criticized for the world’s most frequent user of non-tariff measures (NTMs). In the present work, empirical findings on India’s import tariff evaluation during the recent financial crisis revealed many insights. At the sectoral level, India’s area of coverage of trade liberalization (ACTL) of pre and post crisis yields different results. They are the following: a) Heavy industry is still a highly protective sector, while agriculture and allied sectors are well liberalized; b) Light industry shows a moderate level of liberalization. c) The comparative ACTL of pre and post-financial crisis of four sectors proves expansion in agriculture, contraction in heavy industry and light industry whereas stagnation in allied; d) The analysis of India’s trade liberalization stage index in pre and post-financial crisis reveals a mere difference at 0.05 in the values of TLS which puts India in the level 3 (0.67≤TLS≤1) developed stage of liberalization as evident in equation (2) and (3). For the pre-financial crisis the TLS is: Y = TLS = 0.207×0.9 + 0.776×0.24 + 0.217×0.86 + 0.190×0.98 = 0.75≤1 (2) While, for the post financial crisis value of TLS is: Y = TLS = 0.193×0.9 + 0.668×0.26 + 0.256×0.68 + 0.185×0.94 = 0.70≤1 (3) On the one hand, the entire empirical investigation of import tariff illustrates the sectoral imbalance in India’s trade liberalization; however, on the other hand, it indicates no major changes in the most favoured nation (MFN) tariff on the majority of the product during the crisis. Quantitative results are in line with the Trade Policy Review of India, WTO 2011. India made a consistent effort on tariff front. The findings of the TLE supported India’s efforts in making tariff regime simpler and revealed the need of further liberalization in heavy industry and light industry sector. Trade Policy reforms worked at bilateral level too and did add positivism on India’s ongoing free trade agreement (FTA). As an outcome of the comparative trade reform policy, trade empirics of India and Hungary reveals for a more steady trade path for bilateral trade in both economies. Such opportunities would have been a mere dream in the absence of a proper trade reform. The economic reforms started in 1991 made India more vibrant on the front of export with higher growth rate. By the end of the eight plan, India had a less restrictive policy compared to last many decades. Trade indexes establish India a much reformed partner of the global economy. Gradual analysis of plan documents proves that India took many bold steps in making trade working. The results from the e-questionnaire place India’s trade liberalization at the moderate level and suggest for more proactive steps in trade liberalization. As one of the outcomes of this thesis, we found the continuity of India’s trade liberalization with enduring protection.
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