The International Trade Liberalization of India

Final Paper

March 14, 2005

The International Trade Liberalization of India

According to many global economic studies the key to peace is through the promotion of free trade and the institution of democratic principles, this theory also known as liberal international relations theory. In late 1991, with the transfer of the Indian Parliament into the hands of political and economic reformers, despite much opposition, India began its quest towards liberalization. The reform implemented freer trade in the largest democracy in the world. Facets of the Reformed Policy since India's independence from British control in 1947 until India's Prime Minister Narasimha Rao took office, have characterized Indian's foreign policy as fairly isolationist. During the Cold War period India retained a policy of nonalignment. It was uncommitted to either the West or the East and stuck to an "Swadeshi" ideology. This Swadeshi ideology simply meaning "India first," and was an extremely nationalistic ideology that advocates self-sufficiency.

Just under a decade ago, Indian foreign policy has taken significant strides towards liberalization. Since Prime Minister Narasimha Rao assumed his position as the head of this state in economic shambles, India has undergone significant reform in its domestic and foreign economic policy. Rao's administration implemented major changes in international banking, interest rates, and the ability to fully convert rupees (India's currency) into international tradable transactions. But most importantly, towards the end of 1991, Prime Minister Narasimha Rao opened India's doors to international foreign investment. Many global economic studies stated the reforms in 1991 were simply necessary. As Clive Crook reported in The Economist at the time, the new government attempted to restructure the "ever-proliferating bureaucracy" and the "license raj". This reshaping dismantled the barriers for international foreigners to enter into the Indian markets. Such barriers included series of permits and licenses granted only by members of the Indian Parliament or high-ranking bureaucrats. These complicated and inefficient policies turned away potential foreign investors and, therefore, hurt the Indian economy. As part of the reform plan, Prime Minister Narasimha Rao implemented revolutionary changes.

According to the Asian Survey by Nalini Kant Jha, Prime Minister Narasimha Rao limited the equity participation to 40% and removed the provision for the necessity of local control of industry. India also turned into favoring export-led growth; therefore, it removed restrictions on foreign trade and significantly reduced customs duties and tariffs on imports.

Since the advancement towards liberalism and the legitimacy of its government, India has strongly remained the largest democracy in the international environment. It is a democracy with numerous political parties and strong coalition governments. As a result of the policy reforms in 1991, India has moved into a new era, an era of international trade liberalization.

However, India's democracy is much different than the government of any other third world nation in existence today. Much of public policy is actually influenced by the public. Political parties and public activists play a major role in the creation and sustenance of governmental political and economic policies. According to Amartya Sen in his work entitled, India: Economic Development and Social Opportunity, "The democratic framework of the Indian polity permits this exercise (of public influence) in ways that are not open in many other developing economies." As a result, the major political actors in India's international relations have been and remain the constituents of the democratic state. Also India's new economic policy of freer trade is leading the country to better relations with western nations, such as the United States. The Indo-U.S. relations prior to this new liberal era have been known to be quite sour. This tension existed due to the nonalignment policy of India during the Cold War Era and the Swadeshi temperament of the Indian Parliament during that time. When Prime Minister Narasimha Rao took office in 1991, he sought to mend the relationship through liberal ideology. His plan was to increase trade between the world's two largest democracies and, as a result, turn the existing tension into mutually beneficial alliance.

In 1994, Prime Minister Prime Minister Narasimha Rao and Finance Minister Manmohan Singh (architect of the economic reform), visited Washington DC. This strategic visit attempted to relieve tension between the two states. During their stay in the United States, Rao and Singh met with many American business individuals and made agreements to increase approved U.S. investment in India from $2 billion to between $20 and $25 billion in the following years. These increased investments by the U.S. during the 1990's lead to a continual increase of foreign investment in India by many other nations. A well noted example would be on May 23, 1994, in which a published issue of Forbes magazine illustrated a picture of India on the cover with text that said, "India may be the best emerging market of all." Foreign interests in India have been increasing exponentially and as a result India has moved far away from its Swadeshi years, to an age of global interdependency. However the reforms of 1991 have not been widely accepted by all Indians.

Much opposition to the increasing liberalization of the Indian economy still exists. This opposition has been mainly led by the Bharatiya Janata Party (BJP). The BJP, a nationalistic, Swadeshi, Hindu party, that claims India is shifting in the wrong direction; moving towards a mirage of liberalism only to realize that their developing nation is being exploited by neo-imperialism. According to the BJP Election Manifesto, when Narasimha Rao entered the political scene as Prime Minister of an almost bankrupt India, he became a subject of the Postwar Liberal Order by accepting funds from the International Monetary Fund (IMF) and was, as a result, forced to agree to their conditionality. Thus, India reduced its protectionism by reducing tariffs and barriers of trade. Also, as a result of Prime Minister Narasimha Rao's policy reform, the anti-liberals argue that the nation advanced into a state of enclave economies, where the foreign companies flourished and the domestic ones suffered. The BJP and other Swadeshi advocates claim that the "common man" of India began to suffer due to increased prices in agricultural and food products and decreased