It is time for India to go for another major round of lowering of import tariffs and, in general, taking steps to integrate more with the global economy. When trade was liberalised, slowly in 1991 and then sharply in 1992 and 1993, there was apprehension in many quarters that India would run into a major balance of payments crisis.
In retrospect it is clear that these were among the best policy moves India has made in many decades. The nineties turned out to be the best decade for India in terms of the international sector.
Far from having a BoP crisis, India has seen a build-up of foreign exchange reserves like never before, a creditable growth performance, and a boom in the information technology sector that is making the world take note of the country, and promises to launch the Indian economy into being a player of some significance in the world.
There are several reasons why the time is right for another round of trade liberalisation. There has been a lot of soul searching about India's steadily rising foreign exchange balance. On August 29 this stood at $ 86.3 billion, up from $ 82.7 billion at the end of June and $ 52 billion in April 2002.
In fact, this has been a steady and continuous increase (excepting for a short downturn in 1995-96) starting from 1991, when the balance was close to zero. This is of course all good news and should help shield the economy against a sudden currency depreciation, which can decimate an economy, as we saw happen in the case of Indonesia in the late nineties.
But so much foreign exchange is also an opportunity. And by allowing stocks to build up, are we being over-cautious and not exploiting this window of opportunity? Moreover, the foreign exchange is beginning to have the inevitable affect of causing the rupee to become stronger.
It is not the case that any rise in the value of ones currency needs to be countered. But in this case the Reserve Bank of India is right to be concerned about a rise, since this can hurt India's exports, which are showing buoyancy for the fist time.
Moreover, what is not always appreciated is that the largest factors in the build up of India's foreign reserves are remittances and inward flows by NRIs and Indian workers abroad and these flows are extremely sensitive to the exchange rate. It is now clear that the initial boost to the forex build-up was caused by the rupee's devaluation in the early nineties and consequent boost to inward flows.
The other big and new source of foreign exchange is our software exports, which have just crossed $ 10 billion a year. This figure is difficult to extricate from Government of India statistics, which classifies software exports under invisibles and, specifically, in the category called miscellaneous non-factor services.
Now that software is about a quarter of our export earnings, it is time to create a better name for this than miscellaneous. The government should take care not to hurt this fledgling industry.
Hence, to counter the appreciation of the rupee, the standard practice of the Reserve Bank of India has been to buy up dollars and thereby shore up the dollar price in rupee terms. But this has an important fiscal implication.
The rupees released in the market by such action can cause inflationary pressures and, more importantly, can result in a decline in India's savings and investment rates. The way to counter this is, in turn, for the government to cut back on other expenditures.
Hence, the attempt to hold the rupee value steady by buying up dollars is to exacerbate fiscal strain.
So what should be done, given that we do not want the rupee to appreciate by a significant amount and do not want to increase fiscal strain in the country? The answer is: Go for another round of trade liberalisation, which at this junction means basically cutting import tariff.
Given our success in slashing tariffs in the early nineties, it is easy to forget that India is still one of the highest tariff nations in the world -- by some measures there are only 11 countries in the world (this includes Myanmar and Pakistan) that have a higher average tariff rate than India. India's average tariff rate is currently above 30 per cent.
Moreover, a lowering of tariffs is essential for the country to give further boost to its exports. Excellent export prospects often get stymied by a few inputs, which India does not produce at quality levels needed for producing final goods that meet global standards.
To isolate specifically what these inputs are and to give special concessions for these would lead to messy and intricate government intervention from which we have only now begun to escape and there is no reason to regress on this front. The way to achieve this export boost is to cut back on all import tariffs.
Of course, some indigenous, intermediate goods producers will go out of business. But to keep them in business by hurting our export industry was never a good idea. Further, we have always had a tendency to exaggerate the vulnerability of Indian industries.
Two years ago, when quantity restrictions on the imports of a variety of goods were removed under WTO insistence, there was fear that there will be a surge of imports into India. But a study of 300 especially sensitive items by an inter-ministerial group shows that in the year following the removal of the quantity restrictions, imports rose by only 2.8 per cent.
A tariff cut will increase the demand for foreign goods and hence, typically, for hard currencies, and amount to a natural defence against a hardening rupee. Indeed a part of the current tendency of the rupee to appreciate is artificial and caused by our high tariff structure.
What about the argument that this will hurt foreign direct investment into India, since a high tariff creates incentives among multinational companies to jump the tariff by starting up production inside the nation with high tariffs?
In India's case, the tariff-jumping argument does not hold much water. Note that there are different kinds of FDI. Those that involve large and deep investment -- deep in the sense that it cannot be easily packed up and taken back to the multinational company's home country; and those that can, with relatively little loss, be folded up.
No MNC planning a deep investment will be lured by the current tariff rate. It is transparent to all, that it takes very little for a government to lower its tariff rate, hence this is a bait that an MNC is unlikely to fall into.
This is especially true for India, where it is clear that the country is now on the trajectory of global integration.
Hence, if we want large and deep investments that come here to stay for at least a decade or two, then the high tariff rate is of no consequence.
The writer is professor of economics and director of the Programme on Comparative Economic Development at Cornell UniversityPowered by 
