Quant analysis showsgainsfrom liberalisation petering out; India's inward-looking biaspersists

Context:

Quantitative analysis of India’s economic trajectory suggests that while the 1991 liberalisation spurred decades of growth, the "liberalisation dividend" is indeed showing signs of plateauing. Recent data from October 2026 highlights a persistent "inward-looking bias," where domestic markets remain the primary focus of Indian industry, leaving the economy vulnerable to global capital shifts.

The Plateauing Liberalisation Gains

Recent quantitative indices, such as the India Composite Index (ICI), indicate that India’s external resilience has stagnated. In 1991, India’s percentile rank in external resilience was 45; by 2024, it marginally declined to 42. This reflects a failure to transition from a domestic-centric economy to an export powerhouse.

• Export Stagnation: India’s share of global merchandise exports peaked at 2% in 2022 and has since moderated.
• Net Inflow Volatility: Net FDI inflows as a percentage of GDP, which saw peaks above 4% between 2006–2010, dropped sharply toward 0% (15th percentile) in 2024.
• Productive Capability: While the Productive Capability Index rose from 64 (1991) to 75 (2024), the momentum has slowed significantly since 2011, resembling a "sclerotic" South Asian growth pattern rather than the "muscular" East Asian export model.

 The Persistence of "Inward-Looking" Bias

Despite three decades of reforms, India remains one of the most protected major economies in Asia.

• High Tariff Regime: As of March 2025, India's weighted average tariff rate stood at 12% (compared to 2.2% in the US), with recent spikes in 2026 reaching an average Most Favoured Nation (MFN) rate of 17.6%.
• Non-Tariff Barriers: There has been a sharp rise in Quality Control Orders (QCOs) and Anti-dumping Duties (ADDs). Nearly 92.5% of product lines are subject to non-zero MFN tariffs, and 54% of total imports (by value) fall within the high 10–15% tariff bracket.
• Strategic Import Substitution: The government has identified a $51 billion import-substitution plan targeting 100 specific products to reduce reliance on China, which provided nearly 1/5th of India's $775 billion import bill in FY26. Shift Toward "Performance-Linked" Protectionism

The current policy framework, dominated by the Production Linked Incentive (PLI) Scheme, represents a hybrid approach. It seeks to build domestic scale while remaining "inward-looking" in its focus on reducing import dependency.

• Outlay: ₹1.97 lakh crore ($26 billion) across 14 sectors.
• Impact: Successful in sectors like mobile phones (India is now the 2nd largest producer) but slower in complex supply chains like semiconductors and specialty chemicals.
• The "Rented" Reserve Trap: While forex reserves are high, they are often characterized as "rented" (debt-based) rather than "earned" (export-based), maintaining a permanent external vulnerability.

 While India remains a global growth outlier—with the IMF projecting 7.3% growth in 2025—the structural transition to an export-led economy is stalled by a preference for domestic market protection. Sustaining high growth will require moving beyond "rented" capital and domestic demand toward deep integration into global supply chains.