The major international trade policies of India
Multilateral trade
A defensive policy As the Indian Government declared, “India has taken important policy initiatives since July 1991 to emerge as a significant player in an increasingly inter-dependent world economy. The policy reforms provided a free and conducive environment for trade and include various measures which helped to achieve the high export growth rates in some recent years”. Thus, trade has now become a major plank of Indian economic policy. The Indian position in the multilateral trade system is to profit from and claim different trade preferences allowed to developing countries. As such, it has not fundamentally changed its stance in international negotiations, nor particularly in the negotiation of the Doha Development Agenda. Its objectives are, today as previously, to retain full control of its policy; to refuse, as far as possible, to make enforceable commitments; and, in the Doha Development Agenda, to prevent new commitments limiting the freedom of developing countries. However, while engaging only reluctantly in new trade, India has also become an efficient user of WTO mechanisms such as the Dispute Settlement Mechanism.
India’s reforms as it adapts to global trade competition
India’s liberalizing policy, as well as significant structural and trade reforms have clearly paid off, since Indian economic performances are distinctly impressive these days. Since the liberalization process began in 1991, India's real Gross Domestic Product (GDP) has grown at an average annual rate of approximately 6% and, despite the recent increase in international petroleum prices, GDP growth for 2006/07 was 9%. Services continue to be the largest contributor to GDP (over 54% in 2005/06), while the share of manufacturing has remained relatively stable, at around 16% of GDP, and agriculture’s share has declined to around 18.3% of GDP in 2006. These good economic results are due to important unilateral reforms aimed at opening up Indian economy and trade.
Trading performance, especially in exports, depends on an economy’s openness to competition on the world market. With this in mind, India has launched important structural reforms to liberalize its market and attract Foreign Direct Investments (FDI), which are the main drivers of economic growth, especially in developing countries. An important feature of liberalized markets is the adoption of a competition policy, hence in this case the 2002 Competition Act. This legislation is comparable to modern economics-based legislation and contains provisions relating to anti-competitive agreements, mergers, and abuse of dominant positions. Nevertheless, the law’s enforcement has been delayed. The FDI regime has also been liberalized although it remains restricted in some sectors, where permission is still required. Foreign investment is still not permitted at all in a few sensitive sectors. Until 2003/2004, India’s record in attracting investment was disappointing, with FDI accounting for only 1% of GDP in 2002. Since that time, however, investments have taken off, rising from a value of US$ 6.2 billion in 2001-2001 to 23 billion in 2006-2007. Inward FDI has been particularly important in Information Technology (IT), not only in IT-enabled services and business process outsourcing, but also in the electronics and electrical equipment sector. Recently, FDI liberalization has been made easier by the abolition of the industrial licensing regime. Nevertheless, Indian industrial policy keeps certain strategic industries in the public sector, such as atomic energy, railways, and substances listed by the Department of Atomic Energy; it has also maintained licensing obligations in six strategic industries, among them public health, safety, and environmental considerations, and continues to protect small-scale industries (326 in 2007) against foreign and local investors.
Lack of infrastructure, particularly in transport and electricity, is one of the main obstacles to trade and FDI development. One method of improving this situation has been to encourage private and foreign investments through public-private partnerships and relaxation of FDI restrictions. The electricity industry has been reformed, but structural reforms are still needed to improve efficiency, reduce loss, and to provide electricity to the 43% of the population which cannot yet access it. Even if private and foreign investment are now fully permitted, this particular industry remains relatively unattractive to private infrastructure investors because the cost of producing and transmitting electricity remains much higher than the sale price. In addition, while there is a clear policy of communications improvement, scale, quality, road maintenance and upkeep remain critical, especially for highways, which constitute 2% of the network but carry 40% of the traffic. In addition, as for electricity, private and foreign investment are now allowed in this sector. Apart from the roads, other major communications networks in India include the railways and ports (around 95% of India's trade in goods is sea-borne). In these fields too, the Indian government has introduced policies favoring deregulation, encouragement of public-private partnerships and relaxation of foreign investment regulations in some sub-sectors, but improvement is very slow. As far as air transport is concerned, India adheres to the “open skies” principle, having signed numerous bilateral agreements on transport. The critical challenge in this sector is once again infrastructure. Modernization, in particular through joint ventures and private participation, has been very slow and is, at the moment, very much behind schedule.