Trade Liberalization In India

Abstract

Unrestricted trade stimulates economic growth and bridges socio-economic gaps existing in different countries of the world. India has adopted trade liberalization policies since the early 1990s with the same expectations. This study has empirically analyzed how trade liberalization has affected economic development of Indian country. Its effects have been examined with respect to five key measures of economic development: per capita GDP, income inequality, poverty, employment and productivity over the period from 1985-2011. The main analysis is based on a simultaneous equation model. Keeping in view the simultaneity of the chosen development measures, the model is estimated with the 2SLS technique of regression analysis. The analysis

History of Trade Liberalization in India

What are the reasons that give birth to trade liberalization in India?

By 1985, India had started getting Balance of Payment (BoP) problems. But at the end of 1990 these BoP problems reached to their maximum level and became serious crisis. At that time the

Indian government was close to default and their forex (foreign exchange) reserve reduced to the level that India could finance only three weeks worth of imports. Due to this India had to unfortunately release their national gold reserve as a pledge to an International Monetary Fund

(IMF) for covering of their BoP debts.

Till 1990, India had a import protection policy and its exports was limited with the rest of the world. In addition to that, foreign investment was very difficult to come to India due to trade barriers like import tariffs, taxes etc. But in July 1991, in order to get rid of this Balance of

Payment crisis and restructuring of economy India had adopted key measures and policies which were mainly focused on liberalization, privatization and globalization of economy.

In addition to this, growth and trade liberalization are negatively related to each other.

Trade liberalization has a positive impact on employment level. Interestingly, the total factor productivity is positively and significantly impacted by human capital and trade liberalization.

Conclusion and Policy implication

The purpose of the study is to examine whether the estimates of key development indicators for

India suffer from simultaneity bias. For this purpose we have developed a simultaneous equation model. The results suggested that the 3SLS technique gives effective coefficient estimates which could be used to drag more reliable policy recommendations.

Based on the findings we can conclude that:

· Increase in trade liberalization leads to decrease in poverty of India. As trade liberalization encourages the inflows of goods and services in the economy. Excess supply of goods and services, in turn, is expected to cause a decline in prices and thus increase the standard of

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living of the people of the country. Poverty and growth are inversely related to per capita growth of Indian economy. As economy grows poverty of India decline.

· Trade liberalization leads to increase in distribution of income among individuals in