Economic reforms in India: Implications to foreign trade and investment

This study addresses the policy reforms in India for the period from 1965 to 1995, and undertakes to examine what impact India's economic reforms have had on India's economy in general and in particular on India's trade and direct foreign investment.; The approach is to test the hypothesis that liberalization by adopting a more outward oriented strategy leads to a more efficient utilization of resources and higher levels of growth. Using annual data from 1960 to 1993 we conducted regression analysis on growth of exports and growth rate of Gross National Product. Based on Ordinary Least Square analysis of the equations, there is a clear indication that growth in exports has a positive growth in GDP. The reverse causality is also indicated. By applying the empirical results based on India's experience, we find evidence that economic growth of India's is closely related to its export growth.; By following an outward oriented strategy, India has removed controls on industry and trade and opened the doors to foreign investment. The Indian economy has undergone substantial changes. The external accounts have strengthened considerably. According to the World Bank Country Study, 1995, the GDP growth has risen from 1% in 1991 to 5.3% in 1994/1995. Foreign direct and portfolio investment flows contributed to a large surplus in the capital account and to further accretion of reserve to {dollar}20.8 billion by March 1995. The increased growth rate and external account improvements are based on the stabilization and reform efforts initiated in 1991 and 1995.; A key to India's economic reforms in 1991 was the liberalization of one of the most controlled regimes in the world. Under the new policy the government reduced the number of sectors reserved for public investment. It also reduced the number of sectors in which private investment, domestic or foreign, required prior government approval. The private sector is able to play a major role in newly expanding areas such as electronics and automobiles. Other industries, including steel, oil refining and exploration, air transport, parts and mining are being opened to the private sector in the form of possible divestment of shares in some public sector enterprises.; Further structural reforms are needed in the area of foreign direct investment. The government of India must have a transparent and consistent policy on investment and must simplify regulations. India should open up for private investment and public sector dominated areas of infrastructure, power generation and distribution, railways and expressway construction. Much needs to be done in the area of providing a healthy financial environment to make global investing easy for the foreign investors.