2.2. Beginning of Reforms in the 1980s

A central focus of the reforms was the improvement of industrial productivity. Some important features included selective removal of industrial licensing, import liberalization for exports, partial liberalization of trade policies and procedures, and changes in the foreign direct investment (FDI) regime for capital goods. However, the reservation of production for the small- scale sector continued even while it constituted an important hurdle in the way of developing export capability in labour-intensive sectors such as garments, leather products, and sports goods, where India has comparative advantage. Industrial policy in the 1980s also paid little attention to facilitating the restructuring of the industrial sector by removing the numerous barriers to exit.

Trade policies during the 1980s were consciously designed to improve efficiency and promote exports. The driving force for the reform was easier access to imported intermediate inputs to facilitate capacity utilization and modern capital goods for technological upgradation. Export subsidies were provided in order to offset the anti-export bias resulting from the protectionist regime.

The limited domestic deregulation and trade policy reforms were successful in creating conditions in which productivity in the Indian manufacturing sector grew at 27 per cent per annum in the 1980s compared to a growth rate of –0.5 per cent per annum in the earlier two decades. The industrial growth rate also accelerated to over 7 per cent per annum in the 1980s. Exports of manufactured goods grew at about 11 per cent per annum during the decade. A 45 percent depreciation in the real effective exchange rate in the second half of the 1980s was one of the factors responsible for a significant acceleration in the growth of these exports from 45 percent per annum in the first half of the 1980s to 21.7 per cent per annum in the second half.

The sustainability of the better growth and productivity performance of the industrial sector, however, was being put to test by a deteriorating macroeconomic environment, largely on account of the growing fiscal profligacy of the Government of India during the 1980s. The Gulf War of 1990 and the political instability at the turn of the decade further contributed towards a collapse of international confidence in the Indian economy. The result was the balance-of- payments crisis of 1991.