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India: Foreign Trade Policy

India: Foreign Trade Policy

Although India has steadily opened up its economy, its tariffs continue to be high when compared with other countries, and its investment norms are still restrictive. This leads some to see India as a ‘rapid globalizer’ while others still see it as a ‘highly protectionist’ economy.

Till the early 1990s, India was a closed economy: average tariffs exceeded 200 percent, quantitative restrictions on imports were extensive, and there were stringent restrictions on foreign investment. The country began to cautiously reform in the 1990s, liberalizing only under conditions of extreme necessity.  

Since that time, trade reforms have produced remarkable results. India’s trade to GDP ratio has increased from 15 percent to 35 percent of GDP between 1990 and 2005, and the economy is now among the fastest growing in the world.

Average non-agricultural tariffs have fallen below 15 percent, quantitative restrictions on imports have been eliminated, and foreign investments norms have been relaxed for a number of sectors.

India however retains its right to protect when need arises. Agricultural tariffs average between 30-40 percent, anti-dumping measures have been liberally used to protect trade, and the country is among the few in the world that continue to ban foreign investment in retail trade. Although this policy has been somewhat relaxed recently, it remains considerably restrictive.

Nonetheless, in recent years, the government’s stand on trade and investment policy has displayed a marked shift from protecting ‘producers’ to benefiting ‘consumers’. This is reflected in its Foreign Trade Policy for 2004/09 which states that, "For India to become a major player in world trade ...we have also to facilitate those imports which are required to stimulate our economy."

India is now aggressively pushing for a more liberal global trade regime, especially in services. It has assumed a leadership role among developing nations in global trade negotiations, and played a critical part in the Doha negotiations.

Regional and Bilateral Trade Agreements

India has recently signed trade agreements with its neighbors and is seeking new ones with the East Asian countries and the United States. Its regional and bilateral trade agreements - or variants of them - are at different stages of development: 

  • India-Sri Lanka Free Trade Agreement,
  • Trade Agreements with Bangladesh, Bhutan, Sri Lanka, Maldives, China, and South Korea.
  • India-Nepal Trade Treaty,
  • Comprehensive Economic Cooperation Agreement (CECA) with Singapore. 
  • Framework Agreements with the Association of Southeast Asian Nations (ASEAN), Thailand and Chile.  

Preferential Trade Agreements with  Afghanista, Chile, and Mercosur (the latter is a trading zone between Brazil, Argentina, Uruguay, and Paraguay).

World Bank Involvement

As a number of research institutions in the country provide the Government with good, just-in-time, and low-cost analytical advice on trade-related issues, the World Bank has focused on providing analysis on specialized subjects at the Government’s request.

In the last three years, the Bank has been working with the Ministry of Commerce in a participatory manner to help the country develop an informed strategy for domestic reform and international negotiations.

Given the sensitivity of trade policy and negotiation issues, the Bank’s role has been confined to providing better information and analysis than was previously available to India’s policymakers.

World Bank Reports

Over the last two years, the World Bank has completed two reports:

Sustaining India’s Services Revolution: Access to Foreign Markets, Domestic Reforms and International Negotiation: The study concludes that to sustain the dynamism of India’s services sector, the country must address two critical challenges: externally, the problem of actual and potential protectionism; and domestically, the persistence of restrictions on trade and investment, as well as weaknesses in the regulatory environment.

From Competition at Home to Competing Abroad: The Case of Horticulture in India: This study finds that the competitiveness of India’s horticulture sector depends critically on efficient logistics, domestic competition, and the ability to comply with international health, safety and quality standards. The study is based on primary surveys across fifteen Indian States.

A third study, dealing with barriers to the movement of professionals is under preparation.

The Bank has also held a number of workshops and conferences with a view to providing different stakeholders with a forum to express their views on trade-related issues.

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