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India’s Trade Dynamics: A Balancing Act for Future Growth

India stands as the fifth-largest and one of the fastest-growing major economies globally. However, its historical inclination towards protectionism and a focus on domestic trade have hindered its ability to compete on the international stage.

While India’s tariffs remain significantly high and its participation in global exports is under 2%, the expansive domestic market has been a crucial driver of its economic growth. According to economists, this growth has outpaced many other nations, primarily due to a broader global slowdown. In the current era of economic turbulence and increasing protectionism, India’s commitment to self-reliance may inadvertently act as a temporary buffer against global shocks.

With countries adapting to changing trade policies, notably the recent 90-day tariff pause announced by the former U.S. administration, India’s relative detachment from global trade dynamics seems to have allowed it to withstand disruptions that have impacted other more export-dependent economies. Rajeswari Sengupta, an associate professor at the Indira Gandhi Institute of Development Research in Mumbai, highlights that India’s limited exposure to foreign trade might indeed work in its favor—a slower export-driven economy may leave India appearing comparatively robust, supported by its large domestic market.

“While a hesitant approach to trade has proven advantageous, we must remain alert and engaged with the global market to capitalize on emerging opportunities,” Sengupta suggests. However, this transformation may not come easily due to India’s long-standing complexities related to trade barriers and tariffs.

Historical Context: The Evolution of India’s Trade Policies

In 2024, India’s exports to the United States alone reached $89 billion. The trajectory of India’s trade policies is chronicled in the work of Arvind Panagariya, a prominent economist from Columbia University. His analysis emphasizes the inconsistent and evolving nature of India’s trade strategy.

During the inter-war years, industries such as textiles and iron and steel successfully campaigned for high levels of protection. The aftermath of World War II saw even stricter import regulations enforced via an intricate licensing system. While other Asian nations like Taiwan, South Korea, and Singapore shifted towards export-led growth in the 1960s, India opted for aggressive import substitution, which drastically reduced imports as a percentage of GDP from 10% in 1957-58 to 4% by 1969-70.

By the mid-1960s, imports of consumer goods were entirely banned, resulting in a stagnation of product quality and depriving manufacturers of access to advanced technology and quality inputs, ultimately crippling India’s competitiveness in global markets. As a consequence, exports dwindled, leading to foreign exchange shortages and reinforcing stringent import restrictions. From 1951 to 1981, India’s per capita income growth was a mere 1.5% per year.

The situation began to shift in 1991 when a balance-of-payments crisis forced India to relax many of its import controls and allow the rupee to depreciate, which revitalized the exporting sector and domestic production. The complete elimination of import licensing for consumer goods only occurred in 2001 following rulings from the World Trade Organization.

Following these reforms, India saw a remarkable increase in its exports, soaring six-fold from $75 billion to over $400 billion from 2002-03 to 2011-12. These policies enabled India’s per capita income to rise dramatically during the early years of the 21st century compared to the entire previous century.

Contemporary Challenges and the Future of Trade

Despite initial successes, the movement towards trade liberalization faced setbacks. According to Panagariya, protectionist measures have reemerged multiple times, notably in 1996–97 and since 2018, marked by the extensive use of anti-dumping regulations.

Vivek Dehejia, an economics professor at Carleton University, emphasizes that many post-colonial nations, including India, maintain a deep-seated wariness towards international trade, often viewing it as a form of modern colonization. This perception continues to influence policy decisions, creating hurdles for broader engagement in global commerce.

Moreover, critiques emerge regarding Prime Minister Narendra Modi’s Make in India initiative, which focused on capital-intensive sectors while neglecting labor-intensive industries like textiles. Following a decade of protective policies, the initiative has struggled to significantly bolster manufacturing and export outputs.

Economists argue that insular trade approaches are counterproductive, highlighting that limiting foreign imports restricts domestic revenue opportunities. According to Panagariya, “If imports are curtailed significantly, it limits the revenues that foreign markets can use to purchase Indian goods.” This protectionism often breeds a cronyist environment where established players are insulated from competition, stifling innovation and efficiency.

In light of global shifts, particularly with the U.S. engaging in more inward-looking policies, the European Union is eager for reliable trade partners, a position that India could potentially fill. Yet to capitalize on these developments, experts suggest that India needs to lower tariffs, enhance export competitiveness, and convey a genuine readiness for increased global trade engagement.

Prospects are notable in sectors such as garments, textiles, and toys, particularly for small and medium-sized enterprises. However, after years of stagnation, it remains to be seen if these sectors can expand efficiently with governmental support.

Should trade barriers resume post-trade negotiations in the U.S., India risks a decline in exports, with estimates suggesting a potential drop of around $7.76 billion, or 6.4%, in 2024. As highlighted by Ajay Srivastava from the Global Trade Research Initiative, this scenario necessitates that India diversify its trade agreements and open channels with regions such as the EU, UK, and Canada alongside fostering closer ties with China and other key Asian partners.

The real impact of these strategies on India’s trade landscape will depend heavily on ongoing reforms, simplifying tariffs, enhancing the Goods and Services Tax (GST), streamlining trading processes, and ensuring fair enforcement of quality standards. Without these adjustments, India’s opportunity to thrive in the global economy may slip away.

As India navigates its unique position in the world of trade, the capacity for strategic engagement and openness will determine its trajectory in the years to come.

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