Britain restricts its colony's trade with other nations by controlling the "sterling balances" from India's trade surplus. U.S. imports, however, increase, financed by lend-lease agreements. By the end of World War II, trade between the United States and India is twice its prewar level. India remains dependent on imported machinery, chemicals, and other basic inputs to production.
India is a founding member of the General Agreement on Tariffs and Trade (GATT), yet implements protectionist measures to reduce foreign competition. India accounts for 2.5 percent of world exports, primarily jute, tea, and cotton textiles. Engineering goods represent 1 percent of India's exports.
The government emphasizes self-sufficiency over foreign trade. India's import controls and tariff policy stimulate the production of import-substitution goods by local manufacturers. The government also imposes strict controls on exports.
India's share of world trade shrinks drastically as the country becomes isolated from the international market. Although exports cover the costs of residual import requirements, they are limited. Government-owned industries face little competition or pressure to maintain efficiency. As a result, Indian exports compete on the basis of price rather than quality.
Rising oil prices and subsequent balance-of-payment difficulties encourage India to promote exports. Yet the export sector suffers from India's policy of reserving the manufacture of most labor-intensive, low-tech products for the "small-scale sector" to promote employment. These small producers are unable to compete for contracts with large, international buyers.
India's share of world trade falls to 0.4 percent. Exports finance 60 percent of imports. By 1984, Rajiv Gandhi implements changes to stimulate India's nascent high-tech industry. The government removes import duties on select electronic goods and reduces duties on several critical electronic parts. Indian companies are allowed to partner with foreign companies.
The beginnings of trade liberalization are visible. The government reduces import duties and widens investment opportunities for the private sector. The reduction in tax rates and import deficits is financed through commercial borrowing. Liberalization of imports extends to capital and intermediate goods.
The 1991 economic reform package further liberalizes trade. The government reduces tariffs and trade barriers, eliminates licenses for most industries, and slashes subsidies for domestic products and exports. Many powerful vested interests oppose liberalization, however, and trade remains somewhat regulated. The government bans, for example, the import of many consumer goods.
To meet WTO commitments, India agrees to eliminate quantitative restrictions on many consumer and agricultural product imports, while retaining export subsidies and incentives. Growth of Bangalore's high-tech industry leads to the export of software and supercomputers.
The United States is India's largest trading partner, followed by Japan, the European Union, and OPEC states. India courts Southeast Asia with its "Look East" policy; it holds preliminary trade talks with the regional organization ASEAN, and free trade deals are in the works with Thailand and Singapore.
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