restrictions and very high import tariffs. On the export side, there were both export controls and
export incentive schemes. Following the reform, the maximum tariff was reduced from 400% to
150% in July 1991 and still further later to reach 64% in 1994. The average tariff was reduced from
128% to 94% in 1992 and then to 55% in 1994. In 1992, import licences were abolished except
for a limited group of sectors mainly producing consumption goods. Export subsidies and controls
were abolished.
The industrial policy was completely overhauled.25 Most barriers to entry into industries were
removed. Industrial licensing was abolished in almost all sectors. Controls over investment and
expansion by large industrial firms were also abolished, while the list of industries reserved for the
public sector was drastically reduced.
The foreign investment policy was also completely restructured. Prior to the reforms, India’s
policy toward foreign investment was very restrictive. Equity participation was limited to 40%,
except in a few high-tech or export-oriented sectors. With the reform, this limit was raised to 51%
and foreign investment was permitted in a much larger number of sectors. Further, the Foreign
Investment Promotion Board was created to stimulate FDI in India and the country entered into
bilateral and multilateral investment guarantee schemes.
Finally, the exchange rate regime was restructured. The highly controlled regime based on a
chronically overvalued exchange rate was dismantled. In 1992, a dual exchange rate was introduced,
and in 1994 the rupee became fully convertible on the current account. The capital account has
not yet been liberalized. The restructuring of the exchange rate regime was accompanied by two
substantial devaluations of the rupee. However, due to an immediate pass-through to domestic
inflation, the real devaluation of the rupee was less than 7% (annually) in the years following the
reforms.
In the rest of this section, we review the main empirical studies which have used firm and
plant-level panel data to investigate the effects of this dramatic trade and investment liberalization
25See, inter alia, Jha (2000).
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