48 SOCIAL SCIENTIST FOREIGN TRADE REGIME BEFORE THE EIGHTIES: A BACKGROUND The Indian economy has for a long time enjoyed very high rates of protection. The foreign trade regime comprised an elaborate system of controls, prohibitions and high tariffs, often exceeding 100 per cent. This system was designed to channelise scarce foreign exchange into pre-determined sectors chosen by the national planners and to prohibit the production of luxury goods in the economy. The underlying assumption of this foreign trade regime (FTR) was the 'export pessimism* of the 1950s, which was based on the belief that Third World countries like India faced inelastic demand for their exports (mainly primary products). Given this assumption, the only way to industrialise was to rapidly substitute imports of manufactures from advanced countries with domestic production. Hence, the strategy of import substituting industrialisation was partly an outcome of foreign exchange constrained economic development. In recent years, the critics of this strategy have been rather vocal. They point to the relatively better growth record of export oriented economies of the Pacific Rim, and argue that the excessive protection has spawned an inefficient industrial sector, has discriminated against exports and has made it difficult to realise the growth potential of the economy1. The low and declining share of exports in India's national product, the persistent balance of payments disequilibrium and the rising capital-output ratios are all attributed to the FTR2. India, they argue, has neither been able to transform its economy nor eliminate poverty because the FTR and import substituting industrial policy have spawned a system of controls, quotas and prohibitions which have distorted the incentives to producers and encouraged rent seeking activities.3 In response to these criticisms, the Indian policy makers have begun to liberalise the FTR and the industrial policy in the eighties. In the latter, the emphasis has shifted from planned targets of output and investment to market determined industrial investment. Given the skewness of incomes and assets in India, it is hardly surprising that a host of goods demanded by the more affluent sections of the society are being produced with consumer durable sector leading the growth. Since many of these products and industries have to rely on imported capital goods and intermediates, the FTR was liberalised with the gradual shift from license/quota regime to one based on tariffs. Several thousand products have been placed on what is called OGL (Open General Licence); tariffs on capital goods have been lowered and access to imported intermediates made easier. Through this, the policy makers hoped to modernise several sectors like the automobile, engineering goods, telecom etc., improve India's international competitiveness and raise the industrial rates of growth.