Trade Liberalisation and Economic Restructuring: Can India skip the Industrial Phase? Jayati Ghosh 1 Paper for IDEAs Conference on Post Liberalisation Constraints on Macroeconomic Policies Muttukadu, 27-29 January 2006 Economic integration through trade and investment has now become the dominant development strategy in the world, and a similar strategy has been pursued by India for the last one and a half decades. The explicit goals of the economic reform strategy in India after 1991 with respect to the external sector, were to create a major shift in the momentum of export growth, and to attract very large inflows of foreign capital (particularly in the form of export-oriented FDI) to augment domestic savings and therefore allow much higher rates of gross domestic investment. However, it can be argued (Chandrasekhar and Ghosh, 2004) that in actual fact, the reform process has accomplished neither of these objectives. Rather, it has involved rates of export expansion more or less similar to those of the past, with the exception of the services sector. Meanwhile, it has reduced the viability of cultivation by exposing domestic farmers to very volatile international prices. The potential (and in some cases actual) threat of greater import penetration in manufacturing has reduced manufacturing investment and put particular pressure on employment-intensive small-scale industries. At the same time, financial liberalisation measures have created a much bigger space for volatile short term capital inflows without causing increases in aggregate investment rates. In this paper, the nature and implications of trade liberalisation for the Indian economy are examined in more detail. The first section describes the broad pattern and macroeconomic effects of trade liberalisation. In the second section, the implications for agriculture are considered; while the third section takes up the experience of industry. While the effects of trade liberalisation on the material producing sectors are now acknowledged to have been adverse, it is increasingly common to hear the argument that this does not matter so much because India can benefit from its revealed comparative advantage in tradeable services. This issue is examined in the fourth section. 1 This paper incorporates work done in collaboration with C. P. Chandrasekhar, and reflects continuous discussion with Abhijit Sen and Prabhat Patnaik.