Successive governments have remained focused on trade liberalisation but have largely ignored the need to improve the competitiveness of domestic enterprises
Almost three decades ago, Narasimha Rao and Manmohan Singh took the bold decision to usher in trade and investment liberalisation, undertaking India’s rapid integration with the global economy. Providing a strong rationale for the government’s decision embrace an open-door policy, Singh argued, “Time has come to expose Indian industry to competition from abroad in a phased manner.” For the Rao government, ushering in trade liberalisation was a priority, since, within a month of taking over, the government introduced changes in import and export policies, aimed at reduction of import licensing, vigorous export promotion and optimal import compression.
There was hardly any doubt that India was an enthusiastic participant in the process of global integration. Three decades later, how can the country’s rendezvous with trade reforms be assessed, both in terms of the trajectory India had followed for market opening and the outcomes of this process? More importantly, what are the factors that have contributed to shaping the outcomes?
In keeping with the early pronouncements, the government adopted what was then termed as the ‘big bang’ approach, involving steep reductions in import tariffs. By 1992, India’s simple average tariffs were reduced by nearly a third from the 1990 levels, but its trade-weighted tariffs fell by nearly half, to 28%. The Raja Chelliah committee on tax reforms, established in 1991, suggested that the trade-weighted import tariffs should be reduced to 25% by 1995-96. The government went beyond this target, reducing average trade-weighted tariffs to 23.6% in 1996. However, the simple average of tariffs was considerably higher, at 38.7%.
The tariff reduction process went cold in the second-half of the 1990s, and, consequently, trade-weighted tariffs remained unchanged by the year 2000, while simple average of tariffs declined marginally to 33.7%. This was the scenario despite the fact that, in 1997, then-finance minister P Chidambaram tried to provide momentum to the trade liberalisation agenda by announcing that around the turn of the millennium India would achieve the average levels of tariffs prevalent in ASEAN countries, which were already close to single-digit in some countries. It may be mentioned here that though India’s average import tariffs did not decline to single-digits by 2000, the government of the day took an important step towards realising this objective. This it did by endorsing the Information
Technology Agreement of the WTO, and agreeing to eliminate tariffs on a range of electronic products from the turn of the millennium.
The tariff reduction sequence was put back on track in 2002, and by 2008, India’s trade-weighted tariff was brought down to 6%. During this period, simple average tariff was reduced from nearly 34% to 12%, and it remained around this level until 2017, after which the tariff reduction process was reversed. Lowering of tariffs notwithstanding, India’s trade liberalisation was never a smooth affair. Tariffs could not be lowered for several important manufacturing industries like automobiles, and average tariffs on agricultural products never came down below 34%. Further, during the Doha Round of negotiations at the WTO, India adopted an agnostic view regarding trade liberalisation, a view that was endorsed by successive governments, irrespective of their political affiliations. Concurrently, however, India has been engaged in negotiating FTAs in its efforts to forge strategic partnerships. But, in the recent years, the officialdom has questioned these agreements, suggesting that trade liberalisation via FTAs have not favoured India. It was this scepticism that explains India’s withdrawal from the RCEP trade deal.
Why has India emerged a reluctant liberaliser after the enthusiastic endorsement of trade liberalisation three decades ago? The answer is declining global competitiveness of Indian enterprises in several key manufacturing industries, and of course in agriculture. While unveiling the trade liberalisation agenda, Singh had emphasised the need to increase the efficiency and international competitiveness of domestic entities, as did his successors, but, unfortunately, a coherent strategy was never put in place to realise this objective. Under Singh’s prime-ministership, attention was paid, for the first time, to finding ways to improve the languishing manufacturing sector. The government unveiled the National Manufacturing Policy in 2011, which set the target to increase the share of manufacturing in GDP to 25% within a decade. The NDA government also set a similar target under ‘Make in India’, but the sector’s share remains stagnant, at around 17%.
There is no doubt a major limitation of India’s trade liberalisation agenda has caused this situation. Successive governments have remained focused on trade liberalisation but have largely ignored the need to work towards improving competitiveness of domestic enterprises. Thus, while the policymakers have consistently aspired to make the economy as open as those of the ASEAN members, they ignored the fact that proactive governments in these countries had lent support for strengthening manufacturing—critical investments in both physical and human infrastructure and building vibrant innovation systems were the focus areas. In India, there has been discussion aplenty on the importance of these forms of support, but in terms of delivery, it has been like ‘Waiting for Godot’.
The author is professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU