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Pre-liberalisation period (19471991) Although the history of tariff protection in India goes further back in time, quantitative import

controls were introduced in May 1940 to conserve orei!n e"c#an!e and shipping during World War II. Indian economic policy after independence was in luenced by t#e colonial e"perience , which was seen by Indian leaders as exploitative, and by those leaders' exposure to British social democracy as well as the progress achieved by the planned economy of the oviet !nion. "omestic policy tended towards protectionism, with a strong emp#asis on import substitution industriali$ation, economic interventionism, a large public sector, business regulation, and central planning, while trade and foreign investment policies were relatively liberal. %ive-&ear Plans o 'ndia resembled central plannin! in t#e (oviet )nion. teel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationali$ed in the mid#$%&'s. (awaharlal )ehru, the first prime minister of India, along with the statistician *rasanta +handra ,ahalanobis, formulated and oversaw economic policy during the initial years of the country's existence. -hey expected favorable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme oviet#style central command system. -he policy of concentrating simultaneously on capital# and technology#intensive heavy industry and subsidising manual, low#skill cottage industries was criticised by economist ,ilton .riedman, who thought it would waste capital and labour, and retard the development of small manufacturers. -he rate of growth of the Indian economy in the first three decades after independence was derisively referred to as t#e *indu rate o !rowt# by economists, because of the unfavourable comparison with growth rates in other Asian countries. tarting in $%/0, however, re!ulation o t#e balance o payments became the central concern, and the government introduced explicit restrictions on the rate at which foreign exchange could be run down. .rom then until the launch of the .irst .ive 1ear *lan in $%&$, India alternated between liberali2ation and tighter controls. But the period covered by the 3rst plan was one of progressive liberali2ation. In particular, the 'ndia +ari ((econd ,mendment) ,ct of $%&/ stepped up tariff rates for thirty#two items and paved the way for the liberali2ation of import 4uotas through additional licenses over and above normal entitlements. A balance-o -payments crisis in 19-.-7 led to a ma5or reversal of this liberali2ation, as India resorted to compre#ensive import controls. -he crisis left a sufficiently deep impression on the political leadership that it made the allocation of foreign exchange across various activities the central ob5ective of trade and foreign exchange policy. -he interaction of this ob5ective with an ambitious, powerful, and self#interested bureaucracy produced a regime that was highly

protectionist and without a clear sense of economic priorities. -he number of criteria to be taken into account was large6private versus public sector, small versus large enterprises, and capital versus intermediate versus consumer goods6and the number of industries across which foreign exchange had to be allocated even larger7 within the machinery sector alone they included paper machinery, chemical machinery, mining machinery, tea machinery, and metallurgical machinery, to name 5ust a few. !nsurprisingly, the process 4uickly degenerated into a system of ad hoc rules. -he problem was all industries had priority and how was each sponsoring authority to argue that some industries had more priority than others8 It is not surprising, therefore, that the agencies involved in determining industry#wise allocation fell back on vague notions of 9fairness,: implying pro rata allocations with reference to capacity installed or employment, or shares defined by past import allocations and similar other rules of thumb without any clear rationale. !nder the regime that evolved, producers needed to make only minimal effort to get absolute protection against imports. -he authorities applied the principle of indigenous availability, according to which the government denied the allocation of foreign exchange for importing a product if domestic import substitutes were available in suf3cient 4uantity. -herefore all a producer needed to do to block the entry of imports of a product was to let the relevant agency know that the producer made a substitute for it in the re4uisite 4uantity. -he 4uality of the substitute, the price at which it was supplied, and any delay in delivery were of secondary importance to the authorities. An important switch in policy came in (une $%;;, when India undertook a ma5or devaluation from /.0 rupees to 0.& rupees to the dollar and, alongside, took steps toward liberali2ation of import licensing, tariffs, and export subsidies. -he liberali2ation measures gave 3fty#nine industries, covering <' percent of output in the formal =>organi2ed?@ sector, freedom to import that, rather than devise a set of priorities based on proper economic criteria, the government agencies essentially fell back on simple rules of thumb. .or example, the cuts imposed on various industries immediately following the ino#Indian war in late $%;A and early $%;B were overwhelmingly uniform. ome industrial de#licensing and limited decontrol of steel distribution on the recommendation of the waminathan +ommittee on Industries "evelopment *rocedures had taken place 5ust before and after these steps on the external front. But the de#licensing was mainly aimed at reducing delays in the issuance of licenses. *aradoxically, however, the need to obtain a license remained. Because the licensing procedures continued to apply the principle of >indigenous availability,? the actual liberali2ation turned out to be very limited ex post. -he impetus for the devaluation and other measures had come from the World Bank, which promised a package of C%'' million annually for several years to help 3nance the expansion of imports that would result from the liberali2ing measures. !nfortunately, this policy measure coincided with a second consecutive crop failure, which led to an industrial recession. As a result, a large proportion of the World Bank aid remained unutili2ed in $%;;D;0. ,ore important, the timing of the recession gave credence to the widely held and popular view that the measures forced by the World Bank were the wrong prescription in the 3rst place. Intense domestic criticism, a political leadership that was keen to distribute export subsidies, and an industry that had learned to pro3t from protection came together to reverse the policy in less than two years. In a very real sense, therefore, the timing of import liberali2ation was not ideal, in retrospect7 a burgeoning economy would have increased the chances of making an effective dent in the

practice of granting automatic protection to every activity. En the other hand, it was clear that it was 4uite naFve to expect industrialists . . . to agree to switch over to an ef3cient system involving competition . . . . In this, the pressure groups were often in the company of disinterested politicians =such as the .inance ,inister ,orar5i "esai@ whose thinking had also been conditioned by the planning philosophy of the earlier period7 that anything which could be produced and supplied from domestic capacity must automatically be protected from imports. ince $%;&, the use of high#yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Hevolution in India, which improved the condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. Iowever, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities. ubse4uently the Jmergency and Garibi Iatao concept by which the income tax levels at one point raised to a maximum of %0.&K, a record in the world for non#communist economies, started diluting the earlier efforts.

-he late $%;'s and early $%0's saw a reversal of the $%;; liberali2ation measures and a further tightening of the import controls. -he !. . policy of isolating *rime ,inister Indira Gandhi immediately before and after the Bangladesh war in $%0$ drove her further toward economic isolationism. By the mid#$%0's India:s trade regime had become so repressive that the share of non#oil, non#cereals imports in G"* fell from an already low 0 percent in $%&0D&< to B percent in $%0&D0;. -wo factors paved the way for a return to liberali2ation in the late $%0's, however. .irst, industrialists came to feel the adverse effect of the tight import restrictions on their pro3tability and began to lobby for liberali2ation of imports of the raw materials and machinery for which domestically produced substitutes did not exist. econd, improved export performance and remittances from overseas workers in the ,iddle Jast led to the accumulation of a healthy foreign exchange reserve, raising the comfort level of policymakers with respect to the effect of liberali2ation on the balance of payments. ,d *oc /iberali$ation0 197.91 -he new phase of liberali2ation began in $%0; with the reintroduction of the Epen General Licensing =EGL@ list, which had been a part of the original wartime regime but had become defunct as controls were tightened in the wake of the $%;; devaluation. -he system operated on a positive#list basis7 unless an item was on the EGL list, its importation re4uired a license from the ,inistry of +ommerce. Inclusion on the EGL list did not necessarily mean that the good could be imported freely, however, since the importer usually had to be the actual user and, in the case of machinery imports, could be sub5ect to clearance from the industrial licensing authority if the sector in which the machinery was to be employed was sub5ect to industrial licensing. !pon its introduction in $%0;, the EGL list contained only 0% capital goods items. But

by April $%<< it had expanded to cover $,$0' capital goods items and %/% intermediate inputs. By April $%%' EGL imports had come to account for approximately B' percent of total imports. Although tariff rates were raised substantially during this period, items on the EGL list were given large concessions on those rates through >exemptions,? so that the tariffs did not signi3cantly add to the restrictive effect of licensing. ,ainly, they allowed the government to capture the 4uota rents, thus helping relieve the pressure on the budget. -he government also introduced the antitrade bias of import controls. Above all, during $%<&D%' the rupee was devalued in nominal effective terms by a hefty /& percent, leading to a real depreciation of B' percent. In addition, by $%%' thirty#one sectors had been freed from industrial licensing. -his measure had a trade#liberali2ing dimension as well, since it freed machinery imports in these sectors from industrial licensing clearance. Import Mows were also helped by improved agricultural performance and by the discovery of oil, which made room for nonoil, nonfood imports, mainly machinery and intermediate inputs. As Garry *ursell, a long#time follower of India:s trade regime, notes, >-he available data on imports and import licensing are incomplete, out of date, and often inconsistent. )evertheless, whichever way they are manipulated, they con3rm very substantial and steady import liberali2ation that occurred after $%00D0< and during $%<'s.? "uring $%<&D%', nonoil imports grew at an annual rate of $A.B percent. -he liberali2ation, complemented by expansionary 3scal policy, raised India:s growth rate from the Iindu rate of approximately B.& percent during $%&'D<' to &.; percent during $%<$D%$. -he 5ump in the average annual growth rate was particularly signi3cant during $%<<D%$, when it reached 0.; percent. )evertheless, the external and internal borrowing that supported the 3scal expansion was unsustainable and culminated in a balanceof#payments crisis in (une $%%$. -his time, however, the government turned the crisis into an opportunity7 instead of reversing the course of liberali2ation, it launched a truly comprehensive, systematic, and systemic reform program that continues to be implemented today.