A Study On The Performance Of Trade Policy Reform In India

Freed from the British colonialism which had reigned over India for about 200 years, to promote the economic development, Indian government chose the government-oriented economy, pushing forward the strategy of import substitution. Not until 1991, did India begin its all-round economic reforms, shifting from government-oriented to market-oriented economy and substituting outward looking trade strategy for import substitution. From India's independence till now, the evolution of Indian trade policy can be divided into four phases:The first is the phase of strict restriction on trade (1947-1974), when complicated system of licensing was one of the typical measures taken to regulate trade. The second is the budding phase of free trade reform(1975-1984), when, because of poor international payment conditions, Indian government began to relax the regulation of a few capital goods. The third is the phase of attempting free trade reform(1985-1990), when Rajiv Gandhi made a bold attempt to involve more items in the reform. However, the tariffs were high and the relaxed items were those that could not be produced or could not be substituted perfectly domestically. The reform attempt laid foundation for the subsequent all-round economic reforms. The fourth is the phase of all-round reform and its deepening(1991 till now), when outward-looking strategy was determined and trade restrictions were greatly reduced. The succeeding governments continue the reform and deeper and wider-range of reforms have been carried out.From the budding phase beginning from the mid-70s, and the all-round economic reform in 1991, till the deeper adjustment towards free trade, the trade policy reform has lasted for more than 30 years, which shows a cautious and progressive course. What on earth the trade reform has brought to India's economy and people is what the paper is most concerned about, which is also what the developing countries that have adopted free trade reforms are concerned about.The paper explores the subject from three respects - they are the effects of Indian trade policy reforms on the economic growth, on industrial structure and on employment. The first two together reflect the effect on economic development and the employment effect reveals the welfare effect of trade policy reforms. First, the effect of Indian trade policy reform on economic growth. Theories on the relationship between trade policies and economic growth fall into three perspectives:the perspective of growth theory, the perspective of trade theory and the perspective of institution theories. These theories expound the effects of foreign trade policy on economic growth, pointing out how foreign trade might influence economic growth, by way of increasing economic efficiency, saving rate, and boosting technological progress, capital accumulation, etc.. The institutional perspective emphasizes the coordination between trade policy and institutional environment. In a word, the mainstream theories believe that free trade will be beneficial.With 1975-2008 data, employing econometrical methods of co-integration and Granger Causality, the paper studies the effects of Indian free trade reform on India's economic growth. The findings show that India's free trade reform has contributed to Indian economic growth by enhancing capital accumulation, which confirms the predictions of mainstream theories.Second, the effect of Indian trade policy reform on indusrial structure. Theories on the relationship between trade policy and industrial structure comprise two categories: one is the industrial perspective and the other is the trade perspective. The industrial theory points out the importance of industrial upgrading to economic development. By affecting the demand and supply conditions that are connected with the industrial development, foreign trade will lead to the change of industrial structure. Many industrial economists stress the impact of foreign trade policy on industrial development, and include trade strategy in the strategy of industrial development. In trade theory, both infant industry theory and strategic trade policy are directed at industries, and free trade theories (comparative advantage, factor endowment) believe the industrial structure should conform to the country's comparative advantage and factor endowment. The dynamic comparative advantage theory claims that the comparative advantage does not stay constant, so a country can develop its potential comparative advantage by adopting proper policies. The product cycle theory and Kaname Akamatsu's wild goose theory also indirectly reveals that a country's foreign trade policy will influence its industrial structure.As far as Indian industrial structure is concerned, it is different from most of other countries. Skipping the period of having the second industry as the main ingredient, India enters the phase of having the tertiary industry as the dominating element. India's trade policy has played a positive role in the development of the tertiary industry. The implementation of strategic trade policy boosts the development of IT industry greatly, propelling the upgrading of Indian trade in services. The co-integration test of openness of export of services and service industry reveals India's export in services plays a positive role in the development of service industry. The results of co-integration test with 1981-2006 data show that India's trade reform has a positive influence on investment in the second industry. In sum, Indian trade policy reform helps to promote the upgrading of industrial structure, but its boosting effect on the second industry are yet to be achieved.Finally, the effect of Indian trade policy reform on employment. The main elaboration on the relationship between trade policy and employment lies in H-O model, S-S model, H-O-S model, specific factor model and super-protective trade theory, etc. The first four models discuss the possible changes of factor demands and factor prices owing to the change of relative prices of domestic goods brought about by foreign trade activities. Super-protective trade theory emphasizes the positive role of trade surplus in expanding employment.As to the employment effect, except for IT industry, the trade policy does not show an obvious positive impact. With 1981-2007 data, by using Johansen co-integration method, the paper finds that Indian foreign trade policy has a negative influence on the factory employment.To sum up, Indian trade policy reform plays a positive role in its economic development, but it is not ideal to expand employment. It even has a negative effect on factory employment. Indian government should draw lessons from the past, and make adjustments based on the country's economic conditions and the structure of human resource, to boost the balanced economic development and employment as well.