From Closed Economy to Open Trade

For four decades after independence, India followed a strategy of self-reliance and import substitution: making at home what it could otherwise import.

The old system

• Very high tariffs: some import duties exceeded 150 percent in the 1980s.
• Import licences: businesses needed government permission to import many goods.
• Canalisation: some imports and exports could only be handled by state agencies.
• Restrictions on foreign investment.
• An overvalued rupee, which made exports harder.

The goal was to build domestic industry. But it also protected inefficient firms, limited choice and led to shortages. Indians waited years for a scooter or a phone line.

1991: the turning point

Facing a balance of payments crisis in 1991, India began sweeping reforms:

• The rupee was devalued and later made market-determined.
• Import licensing was largely dismantled for capital goods and inputs, and later for consumer goods.
• Tariffs were cut steadily over the following decade and a half; peak rates fell to around 10 percent for most industrial goods by the late 2000s.
• Foreign investment was welcomed in many sectors.

The results

• Trade as a share of GDP rose sharply.
• Industries such as software, auto parts, pharmaceuticals and later smartphones grew into exporters.
• Consumers gained access to more and cheaper goods.
• Some protected industries struggled with competition.

A partial reversal

From around 2018, India raised tariffs on various goods, including electronics, furniture and toys, as part of a push for domestic manufacturing under Make in India and Atmanirbhar Bharat. More recent budgets have trimmed some rates again, reflecting an ongoing debate about how open India should be.