Development through Global trade. Do you think that India turns global?


East Asian countries, which were move backward than India in 1947, were growing faster than India and improving the quality, of life of their citizens by participating in international trade.

South Korea and Taiwan, which were relatively small countries, were among the first countries in East Asia that gave up import substitution and adopt trade promotion policies.

Unlike India, they had no large internal markets to exploit, and were therefore heavily dependent on foreign markets for selling their products. South Korea followed the Japanese way of promoting large corporations, which strengthened international trade. Taiwan promoted smaller enterprises.


Both nevertheless became heavily dependent on trade and grew at phenomenal rates. Whereas India was growing at about 3.5 per cent per annum in the 1970s, these countries registered a growth rate of over 7 per cent per annum. China was the biggest surprise. China and the Soviet Union were two communist countries whose development policy was premised on opposition to trade, especially with the capitalist world.

All this changed for China towards the end of the 1970s. China realised that it had lost the decade of the 1970s that Taiwan and South Korea had harnessed to promote its exports. Thereafter, Chinese policy too turned global.

It began to attract massive inflows of export oriented foreign investment and began to export low technology commodities to Western markets. This development orientation has given China growth r?tes over 7% over a long period and a substantial trade surplus with the US. The USSR in 1991 and the debt crisis in Latin America in the 1980s lent further support to global trade as a viable route to development.

The Soviet Union, which was the only country that cold challenges the US militarily, had provided strong legitimacy to the ISI as a model of development. The decline and collapse of the Soviet Union because of the serious economic problems that it faced in the 1980s, weakened the appeal of the ISI model.


Latin American countries which had followed different versions of the policy of import substitution were confronted with high level of inflation and sometimes with balance of payments crises. With the appeal of the ISI model already weakened and with the IMF putting pressure on these countries to open up their economies, many Latin American countries increased their trade orientation India turns Global.

In 1991, India moved away from ISI towards trade-led growth (TLG) when the executive used the balance of payments crisis of 1991 to push trade oriented policy reforms. Prime Minister P. V. Narasimha Rao and Finance Minister (Dr.) Manmohan Singh of the Congress Party carved out the political and economic strategy for the transition. Prime Minister Rao and Dr. Singh radically changed India’s trade, industrial and financial policies at a time when industry’s opposition to liberalisation was minimal.

The Gulf War had led to a temporary rise in the price of oil. The government’s spending was in far in excess of what it could afford. Largely as result of the combination of these factors, India was faced with a foreign exchange crunch.

In the early 1990s, India had resources only for about two weeks of imports. Indian industry could not pursue import substitution without imports. They needed the International Monetary Fund’s resources to fund the import of intermediate goods essential for ISI. They also underestimated the threat from foreign corporations and overestimated the benefits of deregulation of industrial licensing.


The result was overwhelming support for liberalisation by Indian industry between 1991 and 1993. Industry’s opposition to the entry of multinationals and the demand for a “level playing field” was articulated only in 1993, by which time important trade promoting policy changes had already been initiated.

Trade unions successfully opposed the IMF inspired policy related to the easy firing of inefficient workers, which is the key for industrial restructuring. They did not oppose the liberalisation of imports or the entry of multinationals, or the delicensing of industry.

The pro-trade executive exploited this window of opportunity to rise above the politics of ISI mentioned above. Dr. Singh’s budget speech of 1991 clearly laid out the problem of the low productivity of investments leading to unsustainable deficits in the Government’s budget and in the trade account. While Dr. Singh handled the economic management, Prime Minister Rao deftly handled the political situation.

Under their stewardship, India witnessed significant customs duty reduction, the encouragement of investment from foreign firms and individuals, industrial licensing, devaluation of the Rupee, and, the full convertibility of the Rupee on the current account.


The pro-trade orientation was continued by the Bharatiya Janata Party (BJP) which came to power in 1996. As the cadres of the RSS, the apolitical ideological heart of the BID were the famous proponents of the “swadeshi” or the self- reliance driven doctrine of economic management, many thought that the pro- trade orientation would end.

The budget of 1998 which wag a mild retreat towards ISI confirmed their fears. However, Prime Minister Atal Bihari Vajpayee and Finance Minister Yashwant Sinha portrayed the liberal face of BJP, against the more self-reliance oriented groups within the RSS and the Swadeshi Jagran Manch. They sustained the momentum of economic liberalisation.

The BJP’s losing elections in three states in the aftermath of the nuclear bomb blast, and the budget of 1998, was a setback for the supporters of ISI. Jaswant Singh’s ascendance to the position of Foreign Minister was a clear assertion of Prime Minister Vajpayee’s liberal outlook.

Yashwant Sinha became convinced about the need for a trade-oriented regime after the political setback of 1998. Finance Minister Jaswant Singh’s Budget for 2003-04 maintained the pro-trade orientation.

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