ABSTRACT
In the middle of the 1970s, the foreign trade and investment policy regime in India was one of the most restrictive in the world (Bhagwati 1993, Bhagwati and Desai 1970). The objectives of the policy regime with respect to the manufacturing sector were to channelize investments in ‘socially desirable directions’, consistent with the Five Year Plans of the Government of India, and to build up a self-reliant and diversified industrial base (Bhagwati and Srinivasan 1975). It is widely recognized that the policy regime was a key contributing factor to the industrial stagnation observed in the Indian economy, especially from 1966 to 1980, though the policies towards self-reliance led a diversified industrial base (Ahluwalia 1991, Mookherjee 1995). A process of gradual reform was initiated in the late 1970s and quickened in pace in the 1980s, culminating in 1991 in a radical set of reforms that dismantled much of the import licensing system and removed most restrictions on foreign direct investment (FDI).
