A Decade of Trade Reforms in India How it compares with East Asia Ramkishen S. Rajan & Rahul Sen The strategic objective of Indian policy makers at the outset of independ- ence was the creation of a self-reliant economy and the reduction of the high levels of poverty that existed, all within a democratic political frame- work. In order to achieve these objectives, the authorities steadfastly pur- sued a Socialist strategy of state-directed, heavy industry based industrialisation complemented by an across-the-board import substitu- tion policy, financial repression and complex industrial requirements. Notwithstanding some notable successes, the highly statist and interven- tionist development policies adhered to during this period of insulation led to a severely distorted production structure. While growth did pick up in the latter half of the 1970s, the Indian economy was generally mired in a vicious circle of low productivity/product obsolescence and slow growth. Not only was the performance of the Indian economy well below the tar- gets set by the planning authorities, the country was left lagging in terms of economic growth and development relative to its East Asian neighbours such as China and Korea, which had broadly similar levels of per capita income at the time of India’s independence (Kelkar, 2001). Although some tentative steps were taken in 1985 to liberalise and unshackle the economy by delicensing a few industries, these partial and rather ad hoc measures contributed to the creation of severe and unsus- tainable macroeconomic imbalances in the Indian economy, particularly with regard to escalating fiscal deficits. The imbalances corresponded to a W ORLD ECONOMICS • Vol. 3 • No. 4 • October–December 2002 1 Ramkishen S. Rajan is at the School of Economics, University of Adelaide. Rahul Sen is at the Institute of Southeast Asian Studies, Singapore. Helpful comments and suggestions by Sadhana Srivastava and conference participants at the Australia National University are appreciated. The usual disclaimer applies. This paper is based on a longer Working Paper by the authors (Rajan and Sen, 2002). Rajan.qxd 10/24/02 8:20 PM Page 1