India in the Global Economy: From Dirigisme to the WTO

India entered the world economy as a claimant demanding reform of the rules, and now participates as a large economy that shapes them. Its negotiating positions have stayed remarkably consistent while its leverage has been transformed.

This is chapter 51 of the PSIR Optional Notes, from the part on India and the World in the Paper II syllabus. The complete book is a free download.

From dirigisme to liberalisation

The trajectory is covered in Chapter 29 and should be cross-referenced rather than repeated. What belongs here is its external face.

The dirigiste external posture, 1950–91. Import substitution behind quantitative restrictions and high tariffs; exchange control and a chronically overvalued rupee; foreign investment restricted through the Foreign Exchange Regulation Act 1973, under which IBM and Coca-Cola left; technology acquired through licensing rather than through equity; and, in multilateral negotiation, alignment with the G-77 in demanding structural reform of the international economic order rather than participation in it.

The reorientation from 1991. Devaluation, tariff reduction, abolition of industrial licensing, opening to foreign direct investment, current-account convertibility in 1994, and a progressive but deliberately incomplete opening of the capital account. The external consequence was that India ceased to be primarily a demandeur for special treatment and became a participant with offensive as well as defensive interests, particularly in services.

India and the WTO

The Uruguay Round and after

India was a founding contracting party to GATT in 1947 and a founding WTO member on 1 January 1995. In the Uruguay Round India resisted the extension of the trading system to services, intellectual property and investment measures, on the ground that these were not trade issues and that the concessions ran one way. India lost on all three and signed as part of the single undertaking.

The outcomes were mixed in a way worth stating precisely. TRIPS required India to introduce product patents in pharmaceuticals by 2005, ending the process-patent regime under which its generic industry had grown, which was a substantial cost. Agriculture bound India’s subsidies against a reference price fixed in 1986–88, which has constrained public stockholding ever since. But services, which India had resisted, became its principal offensive interest: the GATS framework and Mode 1 cross-border supply underpinned the software and business-services export boom, and Mode 4, the movement of natural persons, became India’s central demand.

India’s standing positions

• Public stockholding for food security. India procures at minimum support prices and holds stocks for the public distribution system. Because the Agreement on Agriculture measures support against a 1986–88 external reference price without adjusting for inflation, India’s support ratios approach or breach the de minimis limits. The Bali Ministerial of 2013 produced an interim peace clause under which members would not challenge such programmes, made indefinite in 2014 pending a permanent solution, which has not been agreed. India’s demand is that the reference price be updated and the programmes permanently protected.
• Special Safeguard Mechanism. A right for developing countries to raise tariffs temporarily against import surges or price falls, which was one of the issues on which the 2008 Doha mini-ministerial collapsed.
• Special and differential treatment. India resists proposals to graduate larger developing economies out of the category, arguing that development status is not measured by aggregate GDP.
• TRIPS flexibilities. Compulsory licensing, and the interpretation of patentability standards under Section 3(d) of the Patents Act, upheld in Novartis (2013). India also led, with South Africa, the proposal for a TRIPS waiver on COVID-19 vaccines and therapeutics from 2020, which produced a limited ministerial decision in 2022.
• Fisheries subsidies. India argued for longer transition periods and for differentiated obligations reflecting that its fishers are largely small-scale and subsistence-based, against disciplines aimed at industrial distant-water fleets.
• New issues. Resistance to introducing investment facilitation, e-commerce rules and labour and environmental standards into the WTO before the Doha development agenda is concluded.
• Dispute settlement. Support for restoring the Appellate Body, treated in Chapter 42.

Why India’s clout has grown

The 2024 paper asked for the reasons behind India’s increased weight in the WTO.

• Market size. A large and growing market gives India something to withhold, which is the basic currency of trade negotiation.
• Consensus and the veto. The WTO decides by consensus, so any member can block. India has used this deliberately, most visibly in 2014 when it withheld agreement on the Trade Facilitation Agreement until the food-security peace clause was made permanent in effect.
• Coalition leadership. India anchors the G-33 on agricultural safeguards, works with the African Group and the ACP states, and has coordinated with Brazil, South Africa and China in various configurations, so its positions carry numbers.
• Technical capacity. A sustained cadre of trade negotiators with institutional memory, which many developing members lack, and which allows India to draft rather than merely object.
• Offensive interests. Once India had services exports to defend, it became a demandeur as well as a defender, which gave it standing in more negotiations.
• Systemic position. As the largest developing economy participating fully, India is treated as the Global South’s principal negotiator, which the G20 presidency reinforced.

The counter-consideration to note: the same behaviour is described by others as obstruction, and India’s blocking record has costs in coalitions where partners want agreements concluded.

The current phase

Bilateral and plurilateral turn. With multilateral negotiation stalled, India has concluded comprehensive agreements with the UAE (2022) and Australia (interim, 2022), and with the EFTA states (2024), the last notable for a binding investment commitment. Negotiations with the United Kingdom and the European Union have been the priority, and Chapter 49 covers the latter.

RCEP. India withdrew from the negotiations in November 2019. Its stated reasons: an already large trade deficit with China and the risk of its expansion through tariff elimination; inadequate safeguards against import surges; the absence of a satisfactory base year for tariff reduction; and insufficient movement on services and on the movement of professionals. The counter-argument is that India excluded itself from the largest trading bloc in Asia and from the value chains that RCEP’s rules of origin organise, which raises the cost of the Act East policy.

Industrial policy and supply chains. Production-linked incentive schemes, semiconductor and electronics manufacturing programmes, and participation in supply-chain resilience initiatives with Japan and Australia and in the Indo-Pacific Economic Framework’s supply-chain pillar. This represents a partial return to sectoral direction, which sits in tension with India’s WTO positions on subsidies and is defended on the basis that others are doing the same.

Energy and technology. Energy security as a determinant of external policy, the diversification of crude sources, and the pursuit of critical minerals through the Mineral Security Partnership and bilateral arrangements in Africa and Latin America.

Read the rest. This chapter is one of 58 in the complete PSIR Optional Notes, covering Paper I and Paper II in full — free to download.