Why new government should embrace global markets
- Even as the newly-elected government begins the quest for a Viksit Bharat, here is some trade policy counsel, entirely gratuitous, without provocation and with a dose of abundant humility.
- The period immediately after a General Election is good for breakthrough policy, and if there is an area that needs one, it is trade.
- For, without an increase in trade, India will be unable to emulate the successes of its East Asian neighbors and without heightened competitiveness, it will be unable to trade.
India’s Dilemma
- The Global Financial Crisis of 2008, the Euro Zone struggles of 2010 and the economic downturn as a result of the Covid-19 pandemic recently, all in close succession, have prompted many governments to rethink global engagements.
- India faces many challenges in this regard.
- One is to promote its ambition of an Atmanirbhar Bharat, to make India self-reliant by being “vocal for local”, prioritizing domestic goods over imports.
- It sits uneasily with India’s other ambition of attaining $1 trillion worth of exports.
- India’s export ambition cannot be achieved without integrating with global value chains (GVC), which in turn requires a healthy prescription of openness, foreign direct investment (FDI) and import competition.
- An import tariff or rise in protection is akin to an export tax.
- India’s hard-earned lesson that export promotion and import substitution are conflicting policies looms large over its trade policy and economic agenda.
- The pandemic showed the world the consequences of import disruptions.
- We are banking on the augmentation of local capacity through schemes such as production-linked incentives (PLIs) that provide performance-based financial incentives.
- PLI schemes resulted in the production/sales of Rs 8.61 lakh crore and generated employment (direct and indirect) of over 6.78 lakh.
- Before that, the government exited negotiations for the Regional Comprehensive Economic Partnership (RCEP).
- Its existing trade deficit with China emerged as a key reason for this exit,
- the cooperatives-intensive farm and dairy sector that feared competition from New Zealand and Australia among others.
- India’s journey towards free trade and multilateralism has been fraught with challenges.
- It pursued an aggressive import substitution policy during the 1980s but found import substitution and export promotion to be quite contradictory.
- During the 1991 crisis, it adopted a liberal trade policy but subsequently remained reluctant to embrace second- or third-generation trade reforms.
- This policy narrative slowed down its liberalization and participation in GVCs.
- India has signed several FTAs including four FTAs since 2021 after nine years of no agreements.
- These include the India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA) in 2021,
- India-UAE Comprehensive Economic Partnership Agreement (CEPA), and
- India-Australia Economic Cooperation and Trade Agreement (CECTA) in 2022.
- The latest Trade and Economic Partnership Agreement (TEPA) with EFTA countries (Switzerland, Iceland, Norway, Liechtenstein) was signed on March 10 and secured commitments of $100 billion and 1 million direct jobs over the next 15 years.
India’s Attempts
- Geopolitically, India has attempted to establish itself as an important global player, aided by its hosting of the G20 presidency.
- It is aiming to position itself as an alternate manufacturing destination to China and compete with other South Asian economies like Vietnam, Cambodia and Bangladesh.
- The concept of digital public infrastructure (DPI) has gained significant attention.
- DPI is a potentially transformative process that utilizes ubiquitous digital technologies to connect people and devices.
- Now is an opportunity to shed inhibitions and do a repeat of 1991— without waiting for a crisis to do so.