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Trade and Investment Policy Reforms Since 1991

  • Last Updated : 31 Mar, 2022

India has a long history of being a highly developed economic system with strong commercial ties to other regions of the globe. Many economists hailed India’s 3.5 percent growth rate in 1950, claiming it had double the pace of growth during the British Raj’s last 50 years. It was a success for India’s economic policies, which were introverted and dominated by public sector firms, according to socialists.

India’s GDP growth rate was modest before 1980, but it accelerated once economic reforms began in 1981. After the reforms were fully implemented in 1991, it was strengthened. In the three decades from 1950 to 1980, the growth rate of GNP was only 1.49 percent. During this time, government policies were based on socialism. The income tax rate has risen to as high as 97.75 percent. A large number of industries were nationalized. The government had stepped up its efforts to gain complete control of the economy. Mild economic liberalism in the 1980s boosted GNP per capita growth to 2.89 percent per year. Per capita, GNP increased to 4.19 percent after major economic liberalization in the 1990s.

The Indian government announced important economic reforms in 1991, which were huge initiatives in terms of foreign trade liberalization, financial liberalization, tax reforms, and demands for foreign investment. These policies aid in revving up the Indian economy. Since then, India’s economy has progressed significantly. The average growth rate of Gross Domestic Product (at factor cost) increased from 4.34 percent between 1951 and 1991 to 6.24 percent between 1991 and 2011. In 2015, the Indian economy exceeded the $2 trillion mark.

Trade policy reforms since 1991

The Indian government implemented extensive economic reforms in 1991, including foreign trade liberalization, banking liberalization, tax reforms, and demands for foreign investment. These policies aided the Indian economy in gaining traction. India’s economy has progressed significantly since then.

The following are the key characteristics of the new trade policy: 

Free imports and exports:

Before 1991, India’s imports were regulated by a positive list of items that may be freely imported. Imports have been monitored by a limited negative list since 1992. For example, the 1 April 1992 trade policy liberalized imports of practically all intermediate and capital items. At that time, only 71 goods were still prohibited. On March 31st, 1996, the tariff line voice import policy was initially announced, and 6161 tariff lines were rendered free at the time. Until March 2000, this amount had risen to 8066. From 2001 to 2002, the excise policy removed quantitative limits. India’s obligation to the World Trade Organization has been fulfilled. Quantitative limitations on all import products have been lifted by the World Trade Organization, allowing India to import and export more freely.

Quantitative constraints and rationalization of tariff structure:

In its report, the Chelliah Committee suggested a large reduction in import duties. It had predicted a 50 percent peak rate. As a first step toward a gradual reduction in tariffs, the 1991-92 budgets reduced the top rate of import tax from more than 300 percent to 150 percent. The strategy of lowering customs rates was continued in the following budgets. The government has decreased the maximum rate of duty throughout the years in response to the Chelliah Committee’s proposal. The government decreased tax from 110 percent to 85 percent in the 1993 to 1994 budget discussion. The duty was reduced further in stages in the future budget. The highest important duty rate on all non-agricultural commodities is currently merely 10%.

Houses of Commerce:

Under the 1991 policy, export houses and trading houses were allowed to import a wide variety of goods. For the objective of encouraging exports, the government also allowed the establishment of trading houses with 51 percent foreign equity. Export houses and trading houses, for example, were given the benefit of self-certification under the advance licensing system, which allows duty-free imports for exports, under the 1992-97 trade strategy.

Rupee Depreciation and Convertibility in Current Account:

On July 1 and 3, 1991, the government made a two-step downward adjustment in the rupee’s exchange rate of 18-19%. The introduction of Liberalized Exchange Rate Management System (LERMS), which included partial rupee convertibility in 1992-93, full convertibility on the trading account in 1993-94, and complete convertibility on the current account in August 1994, was followed by the introduction of LERMS.

The rupee’s convertibility was another international trade protection mechanism in the Indian economy. In the 1992-93 budgets, the Indian government made the rupee partly convertible. This was excellent news for India’s economic connection with the global economy. In August 1994, the rupee was rendered fully convertible on the current account. The currency rate of the rupee in India is now determined by the market (since March 1993). Supply and demand dynamics now play a significant role in determining the exchange rate of the rupee in this system.

Trading Houses:

The Exim Policy of 1991 authorized the establishment of export houses, trading houses, and star trading houses for the purpose of importing a wide range of goods. The government, on the other hand, has allowed trading firms with 51 percent foreign shareholding to be established in order to promote exports. Export houses and trading houses were given the benefit of self-certification under the framework of advanced license systems, which typically allow duty-free import for exports, according to FTP 1992 to 1997.

The third addendum to the international trade policy for the years 2004 to 2009, which was issued in April 2007, classified export houses into five categories: i. Export houses ii. Export homes of distinction iii. Trading houses iv. Premium trading houses v. Star trading houses. The trading firms are granted the above rank based on their achievements, such as export volumes of rupees 20 crore, rupees 100 crores, rupees 500 crores, rupees 2500 crore, and rupees 10000 crores, etc. According to their classifications, these houses receive various perks and concessions.

Investment Policy Reforms Since 1991

During the post-reform period, the government made several steps to encourage foreign investment in India. The following are some of the most crucial indicators:

  • In 1991, the government established a list of high-tech and high-investment priority industries for which automatic authorization for foreign direct investment (FDI) up to 51 percent foreign equity was granted. For several of these industries, the cap was lifted to 74 percent and then to 100 percent. Furthermore, over time, several new industries have been added to the list.
  • The Foreign Investment Promotion Board (FIPB) was established to engage with international companies and approve direct foreign investment in certain sectors.
  • From time to time, steps were taken to encourage foreign institutional investment (FII) in India.
  • Foreign investors that participate in Special Economic Zones benefit from a variety of tax breaks, including exemptions from taxes on export earnings, capital gains, dividend distribution, customs tariffs on imported goods, and local excise.
  • The 1991 industrial policy justified foreign investor entry by noting FDI’s inherent benefits, such as advanced technology, established management competence, and current marketing strategies.

Conclusion  

India faced an economic crisis in 1991 as a result of its external debt. Since then, the government implemented a new set of policy measures that shifted the direction of our development strategies. Furthermore, it has increased to improve the international competitiveness of industrial output, foreign money, and technology, trade and investment were liberalized. Govt. also used modern technology to increase domestic industrial efficiency, by added quantitative restrictions on imports and exports were relaxed as an aim to reform the trade policies of India. 

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