After independence, the Government of India had banned foreign trade and foreign investment. This was necessary to protect the country's producers from foreign competition. Industries were set up in the 1950s and 1960s and at this stage industries were not allowed to compete with imports. Therefore, India allowed the import of only essential items, such as machinery, fertilizers and petroleum.

In the year 1991 the economic policy was changed. The government decided that the Indian producers would have to compete with the world's producers so that the country's producers would improve their performance and improve their quality. Therefore, barriers to foreign trade and investment were removed to a large extent. This means that goods can be easily imported and foreign companies can set up their offices and factories here. The process of removing barriers and restrictions by the government is called liberalization.