Boosting growth in a protectionist world

G Parthasarathy | Updated on August 22, 2019 Published on August 22, 2019

Chips matter: The electronics sector is crucial for India’s economic growth   -  Getty Images/iStockphoto

Improving ‘ease of doing business’ apart, India needs to develop a vibrant electronics sector and leverage the FTAs better

The advent of the twenty-first century marked the turning point in India’s economic growth. The end of US and western sanctions, imposed after our nuclear tests in 1998, led to an economic boom, in the first decade of the 21st century.

This economic boom was triggered by the economic liberalisation ushered in by Prime Minister Narasimha Rao. The Indian economy experienced an over 9 per cent rate of growth, during three consecutive years, of 9.48 per cent in 2005-06, 9.57 per cent in 2006-07 and 9.32 per cent in 2007-08. The rate of growth, thereafter, reached 8.59 per cent in 2009-10.

The rates of growth in India have, however, been lower in the present decade, varying between 6.7 per cent and 7.4 per cent, with an unusual fall to a mere 3.2 per cent, in 2013. While these rates of growth are relatively high by global standards, they do not match the levels China continuously achieved for over two decades, when Deng Xiao Ping’s reforms began paying rich dividends.

The growth in India’s global merchandise trade during the first decade of the present century far exceeded the country’s domestic growth figures. Merchandise exports expanded significantly, rising from $44.2 billion in 2001-02 to $306 billion in 2011-12.

The same cannot be said of our exports of goods in the second decade of the century.

Merchandise exports have remained almost stagnant in this period, at around $300 billion annually, while our annual imports have now gone past $500 billion.

India’s service exports, spearheaded by information technology, however, rose from $137 billion in 2011-12 to $205 billion in 2018-19. But, continually high deficits in world trade of goods and services are neither desirable, nor sustainable.

Ambitious goal

Prime Minister Modi has set the country an ambitious goal of building a $5 trillion economy by 2025. This will necessitate an economic growth of well over 8 per cent per annum — a target we have achieved for a few years, during the past two decades.

Modi recently alluded to initiatives to boost the capital of public sector banks, promote productivity and exports of agricultural products, boost industrial production and incentivise the services sector, while fostering the ease of doing business.

He expressed understanding of concerns of the business community and assured that honest taxpayers would not be harassed. Foreign investors, however, note that setting up new industries in India is a daunting and often frustrating task. Some State Governments, however, recognise the need to be investor-friendly.

Trump effect

The external challenges in promoting trade and industry today are more formidable than what prevailed a few years ago. Globalisation is now virtually a swear word in the US and parts of the EU, where industries unable to face foreign competition, especially from China, are crying foul. India is losing its competitive edge in traditional industries like textiles, to countries like Bangladesh and Vietnam.

President Trump’s protectionist policies have hurt America’s friends, allies and foes alike. His moves against globalisation, commenced as soon as he assumed office, by US withdrawal from participation in the Trans-Pacific Partnership. This grouping linked major economies across the Asia-Pacific, from the US, Canada and Mexico, to Australia, Japan and members of ASEAN.

He then unilaterally raised protectionist walls against major partners including Canada, Mexico, China, Japan and South Korea.

The US has also clamped additional duties on a wide range of products from allies, ranging from Germany and France, to Japan and South Korea. The most wide-ranging US Trade sanctions have been imposed on China, though Chinese business and trade practices have not exactly been ethical. China had a massive trade surplus with the US, of $420 billion last year.

Trump’s actions have triggered the biggest trade war in contemporary history, with China retaliating on some US exports, with little, or no impact. While the US trade deficit has reduced after the imposition of trade sanctions, China is already feeling the impact of these sanctions on its economic growth.

While the US and China could well reach an agreement, in the course of time, this trade dispute has global repercussions. India, like many others, has itself been hit hard by enhanced American duties on a range of products like aluminium and steel, and measures to end of trade preferences, it enjoyed as a developing country. India has retaliated, with its own sanctions on a number of US products. Trump has indicated that like China, India will get no benefits available traditionally to developing countries.

New Delhi also recognises that its own trade practices are now seen as being excessively protectionist, with a large number of countries prepared to seek remedial measures, by reference to the WTO. Negotiations have commenced with the US, which remains concerned by existing and new Indian protectionist tariffs/restrictions, on items like medical devices, apart from electronics and telecom products.

There is obviously going to be serious bargaining ahead, before we can conclude a satisfactory trade agreement with the US. India must, however, realise that it cannot become a significant, modern economic power unless it develops a vibrant electronics industry, with an indigenous capability for research and development and a substantial manufacturing capability to produce crucial items like semi-conductors and computer chips.

‘Act East’ policy

India’s “Act East” policies have included Free Trade Agreements with ASEAN, Japan and South Korea. These agreements have brought us trade benefits, as our regional partners have made good use of them. We need to significantly improve our use of these arrangements.

We face difficult choices in dealing with negotiations, now under way, for an Indo-Pacific economic community, labelled as the “Regional Comprehensive Economic Partnership” (RCEP), which includes ASEAN members, together with Japan, China, South Korea, New Zealand and Australia.

There are understandably serious misgivings about joining the RCEP, given our concerns about China’s trade practices and our huge trade deficit with Beijing. These challenges have to be faced and overcome, while moving ahead in building the $5 trillion economy that Prime Minister Modi envisages by 2025.

With enthusiasm for post Cold War style “globalisation” declining in Europe and the US, India now faces serious choices it has to make, given the security and diplomatic challenges it faces, from an increasingly assertive China.

While Chinese military and economic power can be balanced by partnerships with like-minded countries like Japan, Vietnam and Indonesia, India will have little leverage left with its “Act East” partners, if its economy lacks the strength and competitiveness, enabling it to become a significant economic partner, in the Indo-Pacific region.

The writer is a former High Commissioner to Pakistan

Published on August 22, 2019

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