After four long decades after independence, India’s prolonged protectionist trade regime was jettisoned in 1991 with a big bang liberalisation of trade in goods accompanied by slow but steady liberalisation of trade in services and capital flows. The latter culminated in formally full current account convertibility with no restrictions on foreign exchange transactions for imports and exports, but limited capital account convertibility with restrictions on foreign exchange transactions for investment purposes. The WTO was a principal architect of a new international economic order fostering free trade and competitive markets.
Under this new order, the world economy started experiencing rapid growth, and countries that adopted liberalised trade policies were the greatest beneficiaries of this growth surge. Emerging as an active player in the world economy, India could also capitalise on this growth experience. It could carve out a niche for itself in global markets for skill and knowledge-intensive products such as IT, IT-enabled services, biotech and pharmaceuticals, where Indian producers became prominent players in the world market.
India’s export driven robust growth performance in the first decade of this century (averaging about 8% per annum) coupled with its policy of limited capital account convertibility made it possible for the country to withstand the 2008 global financial crisis that crippled much of the world. Between 1991 and 2007, the share of exports in India’s GDP tripled and reached nearly 22% – just in the same way as China’s corresponding share tripled in the first 18 years after opening up in 1979. India’s growth performance persisted even after the global crisis of 2008.
The free trade philosophy adopted in the 1990s led to a massive realignment of world trade patterns and the distribution of gains from trade. Liberalised world trade under the WTO-driven international economic order has benefitted the emerging economies in expanding their export markets much more than the Western world. The latter found it very difficult to cope with the competitive pressure created by emerging economies and therefore turned away from free trade towards rising protectionism. The WTO, the multilateral institution championing the cause of freer and fairer trade, was made increasingly irrelevant, especially after the stalemate in the Doha round. India, in recent years, has followed suit and encouraged greater protectionism in many spheres of economic activities.
