India’s economic reforms debate still begins at home: taxes, labour laws, privatisation, insolvency and the cost of regulation. That list is no longer enough. Export performance and investment are increasingly shaped by rules written in Brussels, London and other major markets. New Delhi may dismantle barriers at home and still find that Indian firms face higher barriers abroad.
The domestic choices have also become less clear-cut. Consumers want lower prices. Indian businesses seek protection from large foreign competitors. Investors want stable rules. Regulators worry about concentration and market power. A change that one group regards as reform may look like preferential treatment or lost protection to another.
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A new report by the Competere Foundation illustrates the problem. India improved its position from 82nd to 57th on the foundation’s Market Distortions Performance Index between 2010 and 2023, helped by measures such as the goods and services tax, the Insolvency and Bankruptcy Code and improvements in trade facilitation. The report estimates that the existing distortions could cost the economy $173.6 billion over five years, equal to roughly 4.2% of India’s GDP.
Next-gen economic reforms must look beyond tariffs
The reforms of 1991 addressed barriers that the Indian state had itself erected. The government could remove licences, lower tariffs and open industries to private investment. The next round reaches into product standards, competition policy, digital markets and restrictions on investment. Some decisions lie with New Delhi. Others do not.
India has used the first reform phase reasonably well, but remains a lower-middle-income economy with too many small and unproductive firms. The IMF identifies complex compliance requirements, labour regulation and product-market rules among the reasons firms fail to grow. It also points to weak innovation, limited adoption of foreign technology and low rates of business entry and exit.
Export policy shows why domestic reform is no longer sufficient. India has signed a number of trade agreements to secure better market access. Tariff concessions matter, but exporters now face a large share of the costs after their goods cross the border.
The European Union requires compliance with sanitary and phytosanitary rules, pesticide-residue limits, technical standards, conformity assessments, traceability requirements and environmental regulations. Each may have a defensible public purpose. Together they impose a substantial fixed cost, which large companies can absorb more easily than smaller exporters.
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Traditional tariffs have declined across much of world trade. Governments now use domestic regulation to pursue environmental, industrial and strategic objectives. The European Union’s carbon border mechanism, deforestation rules and product standards affect access to its market without taking the form of conventional customs duties.
Trade agreements do not automatically resolve these differences. A tariff preference has limited value when an exporter must redesign its product, reorganise its supply chain or obtain several certifications before entering the market.
The proposed sanitary and phytosanitary agreement between Britain and the European Union offers an example. It envisages dynamic British alignment with relevant EU rules. Competere argues that this could reduce the practical value of agricultural concessions under the India-UK trade agreement because Indian exporters selling in Britain may still have to meet EU food, plant and animal-health standards. The UK-EU arrangement remains under negotiation, but its direction is clear.
India’s trade diplomacy must therefore move beyond bargaining over tariff schedules. It needs greater engagement in international standard-setting, mutual-recognition agreements and the scientific basis of health and environmental restrictions. Coalitions with other exporting countries may matter as much as bilateral trade negotiations. A country that does not influence the rule will eventually have to comply with it.
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Economic reforms at home still matter
External barriers do not excuse India’s own restrictions. Foreign investment in multi-brand retail remains capped at 51% under the government route and is subject to investment, sourcing and state-level conditions. The relaxation for inventory-based e-commerce applies narrowly to goods manufactured in India solely for export.
These restrictions protect a large and politically important retail constituency. They also prevent companies from combining procurement, warehousing, logistics, inventory management and retail operations. Such integration can cut costs and spread better practices through the supply chain.
The gains, however, do not accrue evenly. Consumers may get lower prices and more choice. Suppliers may gain access to larger procurement networks. Some retailers may lose business, while dominant platforms may acquire excessive bargaining power. The government has to decide which risks justify restrictions and which can be handled through competition law.
That requires a distinction between protecting competition and protecting competitors. The first benefits consumers and productive firms. The second can preserve inefficient business models and raise costs across the economy.
The same difficulty appears in digital markets. Domestic firms want protection from multinational platforms. Foreign investors want predictable regulation. The Competition Commission of India and sector regulators must prevent abuse without turning scale itself into an offence. A reform policy cannot promise all these groups their preferred outcome.
The next reform round is harder because its gains and losses are more visible, while foreign rule-makers can undo domestic gains. New Delhi can no longer treat trade diplomacy and domestic reform as separate files. It will still have to choose. Easier procedures at the margin are useful; they do not add up to a new growth strategy.