Economic Liberalisation in India-Balance of Payments Implications

In recent years, a gradual shift from import-substituting industrialisation under QR towards a more liberalised economic regime is beginning to take place in India. In this paper, we accept economic liberalisation (as being proposed in various official pronouncements of the government of India) as a policy objective and try to work out the contours of a policy package to accompany the liberalisation attempt so that it can be sustained in the long run. It is argued that the sustenance of liberalisation will rest crucially on whether our export earnings will increase sufficiently in the not-too-distant future. In this paper, the experience of other countries (particularly S Korea) along the path of economic liberalisation is reviewed. The empirical as well as theoretical analysis in this paper suggests that investment in export industries must be made more profitable relative to investment in import-substituting industries in order to encourage resource movements from import-substituting industries to export industries which is so essential for the long-term increase in export earnings and consequently for the sustenance of economic liberalisation over the long haul. With that end in view, the paper emphasises the crucial role of the exchange rate mechanism. In the specific Indian context, the paper brings together evidence to suggest that the economic regime in India is in fact biased against exports and urges for the use of the nominal exchange rate as a policy instrument to achieve and maintain an appropriate level of the purchasing-power-parity-adjusted effective exchange rate.