Indian Trade Liberalization Essay, Research Paper

The Liberalization of India

According to Eichenberg in his lecture on February 2, 2000, liberal international relations theory suggests that the key to peace is through the promotion of free trade and the institution of democratic principles. In late 1991, with the transfer of the Indian Parliament into the hands of political and economic reformers, despite much opposition, India began its quest towards liberalization. The reform implemented freer trade in the largest democracy in the world.

Facets of the Reformed Policy

Since India’s independence from British control in 1947 until Rao took office, Indian foreign policy can be characterized as fairly isolationist. During the Cold War period India retained a policy of nonalignment. It was uncommitted to either the West or the East and stuck to “swadeshi” ideology adopted. Swadeshi simply means “India first,” and is an extremely nationalistic ideology that advocates self-sufficiency.

Just under a decade ago, Indian foreign policy has taking significant strides towards liberalization. Since Prime Minister Narasimha Rao assumed his position as the head of this state in economic shambles, India has undergone significant reform in its domestic and foreign economic policy. Rao’s administration implemented major changes in banking, interest rates, and the ability to fully convert rupees (India’s currency) in trade transactions. But most importantly, towards the end of 1991, Rao opened India’s doors to foreign investment.

The reforms in 1991 were simply necessary. As Clive Crook reported in The Economist at the time, the new government attempted to restructure the “ever-proliferating bureaucracy” and the “license raj”. This reshaping dismantled the barriers for foreigners to enter into the Indian markets. Such barriers included series’ of permits and licenses granted only by members of the Indian Parliament or high-ranking bureaucrats. These complicated and inefficient policies turned away potential foreign investors and, therefore, hurt the Indian economy.

As part of the reform plan, Rao implemented revolutionary changes. According to the Asian Survey by Nalini Kant Jha, Rao limited the equity participation to 40% and removed the provision for the necessity of local control of industry. India also turned into favoring export-led growth; therefore, it removed restrictions on foreign trade and significantly reduced customs duties and tariffs on imports.

Advancement Towards Liberalism

Ever since the legitimacy of its government, India has remained the largest democracy in the international environment. It is a democracy with numerous political parties and strong coalition governments. As a result of the policy reforms in 1991, India has moved into a new era, an era of liberalization.

Firstly, India’s democracy is much different than the government of any other third world nation in existence today. Much of public policy is actually influenced by the public. Political parties and public activists play a major role in the creation and sustenance of governmental political and economic policies. According to Amartya Sen in his work entitled, India: Economic Development and Social Opportunity, “The democratic framework of the Indian polity permits this exercise (of public influence) in ways that are not open in many other developing economies.” As a result, the major political actors in India’s international relations have been and remain the constituents of the democratic state.

Secondly, India’s new economic policy of freer trade is leading the country to better relations with western nations, such as the United States. The Indo-U.S. relations prior to this new liberal era have been quite sour. This tension existed due to the nonalignment policy of India during the Cold War Era and the swadeshi temperament of the Indian Parliament during that time. When Rao took office in 1991, he sought to mend the relationship through liberal ideology. His plan was to increase trade between the world’s two largest democracies and, as a result, turn the existing tension into mutually beneficial alliance.

In 1994, Prime Minister Rao and Finance Minister Manmohan Singh (architect of the economic reform), visited Washington DC. This strategic visit attempted to relieve tension between the two states. During their stay in the United States, Rao and Singh met with many American businesspeople and made agreements to increase approved U.S. investment in India from $2 billion to between $20 and $25 billion in the following few years.

During the 1990’s, there has been a continual increase of foreign investment in India by many nations. As a matter of fact, the May 23, 1994 issue of Forbes magazine picture India on the cover with text that said, “India may be the best emerging market of all.” Foreign interests in India have been increasing exponentially and, as a result, India has moved far away from its swadeshi years to an age of global interdependency.

The Opposition to the Reform

The reforms of 1991 have not been widely accepted by all Indians. Much opposition to the increasing liberalization of the Indian economy exists. This opposition has been mainly led by the Bharatiya Janata Party (BJP). The BJP, a nationalistic, swadeshi, Hindu party, claims that India is shifting in the wrong direction; moving towards a mirage of liberalism only to realize that their developing nation is being exploited by neo-imperialism.

According to the BJP Election Manifesto, when Rao entered the political scene as Prime Minister of an almost bankrupt India, he became a subject of the Postwar Liberal Order by accepting funds from the International Monetary Fund (IMF) and was, as a result, forced to agree to their conditionalities. Thus, India reduced its protectionism by reducing tariffs and barriers of trade.

Also, as a result of Rao’s policy reform, the anti-liberals argue that the nation advanced into a state of enclave economies, where the foreign companies flourished and the domestic ones suffered. The BJP and other swadeshi advocates claim that the “common man” of India began to suffer due to increased prices in agricultural and food products and decreased wages due to outside competition.

The BJP has also recognizes the hypocrisy that exists in the Postwar Liberal Order. In referring to the United States and Japan, the party claims that, “Every nation advocates free trade in all global forums, but, in practice, they compulsively resort to quotas, tariffs, and ant-dumping measures to protect their national interests.”

In sum, the neo-imperialist argument of the anti-liberals claims that India is suffering because the reforms caused a decline in the terms of trade and an increase in competition between the large western multinational corporations and India’s local, small, and traditional corporations.

Why the Opposition is Wrong

Neoimperialism is one of the most complex theories of international relations because there are many aspects to fulfill the argument. The claims of the pro-swadeshi Indians that Rao’s reforms of 1991 have resulted in neoimperialism is a weak one. That is because it does not complete the entire argument of neo-imperialism.

According to Eichenberg’s lecture on Neo-imperialism on February 23, 2000, there are two net results of the theory; these are, (1) the limitation on domestic sovereignty and (2) underdevelopment as a result of increased dependency on the global economy. The reform of 1991 did not result in either of these two.

During the last decade, India has opened its doors to numerous and diverse foreign investors; therefore, they do not rely extensively on a single trading partner. As a result, India could not, as Sen puts it, become an “economic prisoner in the international world of open exchange.” Thus, domestic sovereignty remains strong as the existence of multiple international trading partners remain. And these trading partners will remain because of the huge market for all goods and services that exists in India due to its increasingly large middle class. Hence, a high influx of foreign investment from numerous diverse investors will not lead to underdevelopment, but, on the contrary, lead to strong development of the nation’s economy.

Conclusion

Contrary to the beliefs of the supporters of the swadeshi ideology, liberalization is not hurting India, but is, in fact, the state’s best option. The new domestic and foreign economic policies of the Rao administration, not only did strengthen, but also continues to strengthen the economy of the largest democratic nation by opening its doors to outside investment. In doing so, the global importance and international recognition of this future super power has increased. As a result, Indian relations with Europe, the U.S., and the Far East through increased interdependency, ideational similarities, and global interests in the state have begun to improve, leading to a more peaceful international environment.

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