India’s Shifting Trade Policy: South Asia and Beyond

Vinod K. Aggarwal and Rahul Mukherji

Asia’s New Institutional Architecture, 2007

Since 1991, India’s economy has undergone a remarkable transformation. Moving away from years of inward-looking economic policies, it has become a significant force in the global political economy. This chapter focuses on the evolution of India’s new economic policies, particularly in trade, within the context of the larger transformation of Asia’s economic and security architecture after the Cold War.

We utilize the institutional bargaining game framework introduced in Chapter One of this book to analyze the interplay of external shocks and internal political changes and explain shifts in India’s trade policies. In particular, the three shocks of the fall of the Soviet Union, the Asian financial crisis of 1997-98, and the terrorist attacks of September 11, 2001 prove to be significant drivers of India’s policies.2 However, we also find that India’s balance of payments crisis of 1991 and the decision of both India and Pakistan to test nuclear weapons in 1998 were also critical factors. Moreover, as the framework suggests, one needs to look at the interplay between shocks and key domestic political changes in India to explain policy changes. Specifically, we show how India moved away from its import substitution industrialization (ISI) policy to a more liberal domestic economic model and an increasing focus on improving its export competitiveness. In addition, we analyze India’s recent turn toward bilateral trade agreements in the context of frustration with lack of progress in the Doha Round of the World Trade Organization (WTO)—a policy strategy common to Asian countries more broadly.

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