Manufacturing Protection in India Since Independence

Abstract

Soon after independence, India adopted trade policies which made its manufacturing economy one of the most protected in the world. Now, at or near the end of a long series of extremely cautious liberalising reforms over many years, with frequent backtracking episodes, exceptions and false starts, India has emerged as one of the world’s low protection and open industrial economies. Only very few quantitative restrictions (QRs) on manufactured goods remain, export policies for manufactured goods have been streamlined and simplified, and following new reductions introduced in the March 2007 budget, average manufacturing tariffs are now just slightly above China’s and Korea’s and at about the same level as Sri Lanka’s, which has traditionally been considered the sole low protection industrial economy in South Asia. Reflecting this new openness of the manufacturing sector, in 2006 manufactured exports and imports were respectively about 62 per cent and 58 per cent of manufacturing GDP, whereas in the mid-1980s they were only about 16 per cent and 30 per cent. During the ‘License Raj’ years India consistently ran substantial deficits on manufactured goods account, but now manufactured exports consistently exceed manufactured imports and have become an important driver of industrial and general economic growth, increasing at between 20–25 per cent annually since 2002 and probably accounting for about a quarter of manufacturing GDP, compared with only 6 per cent or so during the pre-liberalisation years¹ Despite continuing domestic policy constraints and infrastructure bottlenecks, after many years of disappointingly low growth, since about 2004² the manufacturing sector appears to have moved to a higher growth trajectory of about 9 per cent to 10 per cent annually.