India will have to step up its game to matter in an emerging global order
“President Trump’s protectionist policies have hurt America’s friends, allies and foes alike. His moves against globalization 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 unilaterally raised protectionist walls against major partners, including Canada, Mexico, China, Japan and South Korea”.
“With enthusiasm for post-Cold War style globalization declining in Europe and the US, India faces serious choices, 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 competitiveness, enabling it to become a significant economic partner”.
The advent of the 21st century marked the turning point in India’s economic growth. The end of Western sanctions, imposed after our nuclear tests in 1998, led to an economic boom, triggered by the economic liberalization ushered in by the then PM Narasimha Rao. The economy experienced an over 9% rate of growth during three consecutive years: 9.48% in 2005-2006, 9.57% in 2006-2007 and 9.32% in 2007-2008. The rate of growth, thereafter, reached 8.59% in 2009-2010. The growth rate has been lower in the present decade, varying between 6.7% and 7.4%, with an unusual fall to a mere 3.2% in 2013. While they are relatively high by global standards, they do not match the levels China continuously achieved for over two decades, when Deng Xiaoping’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 in the first decade, rising from $44.2 billion in 2001-2002 to $306 billion in 2011-2012. The same can’t be said of our exports of goods in the second decade. Merchandise exports remained almost stagnant in this period, at around $300 billion annually, while our annual imports have now gone past $500 billion. Service exports, spearheaded by information technology, however, rose from $137 billion in 2011-2012 to $205 billion in 2018-2019. But, continually high deficits in world trade of goods and services are neither desirable nor sustainable.
PM Modi has set an ambitious goal of building a $5-trillion economy by 2025. This will necessitate an economic growth of over 8% 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 incentivize 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 often frustrating.
The external challenges in promoting trade and industry today are more formidable. Globalization 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 globalization 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 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. The most wide-ranging trade sanctions have been imposed on China, though Chinese trade practices have not exactly been ethical. China had a massive trade surplus with the US — $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 sanctions, China is already feeling the impact on its economic growth. This dispute has global repercussions.
India, like many others, has been hit hard by enhanced US duties on a range of products like aluminum and steel, and measures to end 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 recognizes 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 going to be serious bargaining ahead, before we can conclude a satisfactory trade pact. India must realize that it can’t 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.
India’s ‘Act East’ policy has included Free Trade Agreements with ASEAN, Japan and South Korea. These agreements have brought us trade benefits. We need to improve our use of these arrangements. We face difficult choices in dealing with negotiations, now underway, 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 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.
With enthusiasm for post-Cold War style globalization declining in Europe and the US, India faces serious choices, 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 competitiveness, enabling it to become a significant economic partner.
(The author is a former Indian diplomat)