The Evolution of India’s Trade Policy: From 1950 to 2022

Picture this: In 1990, an Indian entrepreneur who wanted to import a simple machine to grow their business had to navigate a labyrinth of permits, satisfy up to 80 different government agencies, and wait months-sometimes years-for approval. Fast forward to today, and India stands as one of the world’s fastest-growing economies, integrated into global supply chains and trading with nations across the world. This remarkable transformation didn’t happen overnight. It’s a story that spans seven decades, marked by ideological shifts, economic crises, and bold policy reforms that fundamentally reshaped how India engages with the world.

The license permit regime: Building walls around the economy 🔗

When India gained independence in 1947, its leaders inherited a nation scarred by colonial exploitation and grinding poverty. The vision was clear: build a self-reliant economy that would never again be vulnerable to foreign control. This led to what became known as the “License Permit Raj”-a term coined by freedom fighter Chakravarti Rajagopalachari to describe the elaborate system of licenses, regulations, and red tape that governed economic activity from the 1950s through 1990.

The cornerstone of this era was import substitution industrialization. Rather than relying on foreign goods, India would produce everything domestically, protecting infant industries behind high tariff walls and strict import controls. Consumer goods were almost entirely banned from import. Average tariffs reached astonishing heights-123 percent on intermediate goods, 115 percent on capital goods, and 129 percent on consumer goods by the late 1980s.

How the system actually worked 🔗

Imagine you’re a manufacturer wanting to import machinery. You’d need to prove the goods were “essential” for India’s development and that no domestic substitute existed-criteria that were applied arbitrarily without clear economic rationale. The rupee was inconvertible, and all foreign exchange earnings had to be surrendered to the Reserve Bank of India. The state decided what would be produced, how much, at what price, and using which sources of capital.

The irony? While designed to promote equality and self-reliance, the system often protected powerful vested interests and bred corruption. Industries operated without competition, producing low-quality goods with little incentive to innovate. The economy grew at what was sarcastically called the “Hindu rate of growth”-a sluggish 3.5 percent annually. By 1991, India’s large but inefficient industrial sector supplied 95 percent of domestic demand for manufactured goods, while exports languished at just 5 percent of GDP.

Crisis and awakening: The watershed reforms of 1991 🔗

Change came not from gradual enlightenment but from crisis. By early 1991, India faced a severe balance of payments emergency. Foreign exchange reserves fell to dangerously low levels, covering less than three weeks of imports. The country had to airlift 67 tonnes of gold to London and Tokyo as collateral for emergency loans. Trade disruptions following the Soviet Union’s collapse and declining remittances from Gulf countries intensified the crisis.

The moment that changed everything 🔗

In July 1991, newly appointed Finance Minister Manmohan Singh stood before Parliament and quoted Victor Hugo: “No power on earth can stop an idea whose time has come.” The idea was that India should take its rightful place in the world economy. What followed was nothing short of revolutionary.

First came rupee devaluation-by 18 to 20 percent against major currencies in July 1991. Then Singh announced sweeping changes: import licensing was abolished for most production inputs, including capital goods, intermediates, components, and industrial raw materials. Peak tariff rates, which had no upper limit before, were capped at 150 percent, with plans for further reductions. The government introduced partial convertibility of the rupee, allowing exporters to retain a portion of their foreign exchange earnings.

Importantly, these reforms were “home-grown” rather than simply imposed by international institutions. While the IMF and World Bank provided crucial support-including a structural adjustment loan of $500 million-the reforms reflected a recognition by Indian policymakers that the country’s problems were structural and fundamental changes were long overdue.

Building momentum: Consolidation from 1991 to 2014 🔗

The 1991 reforms were just the beginning. Over the next two decades, successive governments-regardless of political ideology-continued liberalizing the trade regime. This continuity itself was remarkable and spoke to a new national consensus about India’s economic direction.

The five-year EXIM policy and export promotion 🔗

To provide long-term stability and transparency, the government announced a five-year Export-Import Policy for 1992-97. This was critical because businesses needed predictability to make long-term investment decisions. The policy aimed to simplify procedures and make them more transparent, reducing the discretionary power of officials that had led to delays and corruption.

Several schemes were introduced to promote exports. The ASIDE (Advanced License Scheme for Deemed Exports) allowed manufacturers to import inputs duty-free if they were producing for exporters. The Focus Market Scheme provided incentives for exports to specific countries where India wanted to increase its presence. These weren’t just about boosting numbers-they represented a fundamental shift from seeing trade as something to be controlled to viewing it as an engine of growth.

The WTO ruling that forced India’s hand 🔗

Despite the progress, consumer goods remained subject to quantitative restrictions well into the 1990s. This changed dramatically in 1999 when the World Trade Organization ruled against India in a dispute filed by the United States. The WTO found that India’s restrictions on over 2,700 product lines violated its international obligations under GATT.

By April 2000, India removed quantitative restrictions on most items, with the remaining 715 items freed by April 2001. What many feared would devastate domestic industry turned out differently. The removal of these restrictions didn’t lead to the flood of imports that pessimists predicted. Instead, it gave Indian consumers more choices and pushed domestic producers to become more competitive.

Tariffs come down, way down 🔗

Perhaps the most dramatic change was in tariff rates. Following recommendations from the Chelliah Committee, India embarked on a systematic program of tariff reduction. Peak tariffs fell from 150 percent in 1991 to just 10 percent by the mid-2010s for most products. The simple average tariff by 2015-16 was only one-tenth of the 1990-91 level.

This put India’s applied average tariffs close to those of economies considered very open, like the United States. The spread of tariffs also narrowed, and the regime became much simpler and less arbitrary. Problems like tariff inversion-where processed goods faced lower tariffs than raw materials-were largely corrected.

The role of global institutions: Partners in transformation 🔗

While India’s reforms were initiated domestically, global institutions played a significant supporting role. The International Monetary Fund and World Bank didn’t just provide emergency financing in 1991-they offered technical expertise and conditioned their support on structural reforms, which strengthened the hand of reformers within the Indian government.

The World Trade Organization became increasingly important after India joined in 1995. Beyond the 1999 ruling on quantitative restrictions, the WTO framework provided India with both discipline and opportunities. It locked in reforms, making them harder for protectionist pressures to reverse. It also gave India a platform to negotiate better market access for its exports, particularly in services where Indian companies excel.

Learning from the East Asian experience 🔗

India’s shift was also influenced by watching other countries. The spectacular success of East Asian economies-South Korea, Taiwan, and especially China after its 1978 reforms-demonstrated that export-oriented policies could lift millions out of poverty. China’s phenomenal growth following its adoption of outward-looking policies was particularly influential in convincing Indian policymakers of the merits of liberalization.

The collapse of the Soviet Union, India’s major trading partner under the Rupee Payment Arrangements, removed both an ideological model and a practical alternative to market-oriented reforms. These global developments created an intellectual and political climate conducive to change.

What did all this achieve? 🔗

The results speak for themselves. India’s GDP growth rate accelerated dramatically, averaging 7 percent annually through much of the 1990s and 2000s. About 300 million people escaped extreme poverty. Foreign trade, which had been just 5 percent of GDP, expanded enormously. Indian companies began competing globally, and foreign investment flowed in to take advantage of the country’s large market and skilled workforce.

The changes went beyond economics. The end of the License Raj opened entrepreneurship to many who had been shut out. No longer did you need connections to powerful officials or membership in established business families. Competition replaced connection as the key to business success. Quality improved as companies faced pressure from imports and had to meet international standards to export.

Of course, challenges remain. Infrastructure bottlenecks, labor market rigidities, and remaining areas of protection continue to constrain growth. The reform process is unfinished. But the journey from 1950 to 2022 represents one of the most significant economic transformations of the late 20th and early 21st centuries-a journey from closed-economy socialism toward integration with the global economy, from stagnation toward dynamism, from scarcity toward abundance.

What do you think? Given India’s experience with both protectionism and liberalization, what lessons can other developing countries learn? And as India continues to evolve its trade policy, how should it balance openness with protecting vulnerable sectors and workers?

References

1. https://www.piie.com/sites/default/files/2025-01/wp25-2.pdf
2. https://en.wikipedia.org/wiki/Economic_liberalisation_in_India
3. https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds90_e.htm
4. https://www.brookings.edu/articles/working-paper-trade-policy-reform-in-india-since-1991/