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Need a clear-eyed trade policy to sustain growth

Oct 21, 2024 08:28 PM IST

The current geopolitical moment is to India’s advantage. But India’s economic statecraft needs a serious upgrade if we are to make the most of this opportunity

Four years after it imposed severe restrictions on investments from China, the Union government seems to have accepted the limited efficacy of those measures. The first indication of a rethink came in the finance ministry’s Economic Survey. The survey noted that the recent export growth of Southeast Asian economies relied heavily on Chinese investments. It might be better for India to let Chinese firms manufacture in the country rather than import manufactured goods from China, the survey argued.

A man walks past container trucks sitting parked near the Jawaharlal Nehru Port, operated by Jawaharlal Nehru Port Trust (JNPT), in Navi Mumbai, Maharashtra, India, on Saturday, May 25, 2019. Photographer: Dhiraj Singh/Bloomberg (Bloomberg) PREMIUM
A man walks past container trucks sitting parked near the Jawaharlal Nehru Port, operated by Jawaharlal Nehru Port Trust (JNPT), in Navi Mumbai, Maharashtra, India, on Saturday, May 25, 2019. Photographer: Dhiraj Singh/Bloomberg (Bloomberg)

The commerce minister Piyush Goyal initially played down the survey’s arguments, claiming that there was no rethink on India’s stance towards China. But the commerce secretary Sunil Barthwal let the cat out of the bag a few weeks later. Barthwal told reporters that the government might review restrictions on China as part of an overall review of its foreign direct investment (FDI) policy. Given that all major economies continue to rely heavily on China, India’s inability to decouple from China wasn’t unusual, he said.

Since the two Asian giants are now trying to reduce border tensions, it has become politically acceptable to acknowledge China’s importance in global supply chains. Despite American efforts to dent Chinese dominance in global manufacturing, China continues to play a pivotal role. American imports from China have indeed fallen. But that fall has been matched by rising imports from countries such as South Korea, Vietnam, and Mexico, which increasingly rely on Chinese capital, Chinese inputs, and Chinese know-how to run their factories.

The so-called China+1 strategy used by American companies to reduce dependence on the Chinese economy has only fuelled Chinese investments in factories around the world. The most striking example is Vietnam, which has raised exports to the United States (US) on the back of Chinese investments. Last year, it rolled out the red carpet for both Chinese President Xi Jinping and American President Joe Biden, upgrading its ties with the US to a comprehensive strategic partnership. The Vietnamese have fought bloody wars against the Americans and against the Chinese. Yet, they are unafraid to do business with either. The Vietnamese government woos Chinese investors while taking American help to protect its territorial claims in the South China Sea.

India needs similar clarity in negotiating its relationships with the two superpowers. It needs to engage economically with China even as it deepens its strategic ties with the US. Closer trade links with China and the rest of “Factory Asia” will help Indian firms integrate better with global value chains, raising productivity and growth. Stronger growth will narrow the power differential with China, and deter Chinese aggression over the long run.

In the medium run, India has to take help from the US to tackle Chinese aggression. But that does not mean we define our strategic requirements based on American assessments. India needs to frame its own national security strategy document that identifies sectors and industries critical for India’s defence. Once these critical industries are identified, trade and investment barriers in all other industries should be lowered.

As this column had argued earlier (“A plan to counter China economically”, April 18, 2023), the Union government needs to take the views of all stakeholders — including state governments and Opposition lawmakers — to frame a national consensus on this issue. A national security strategy document should be followed by a comprehensive trade and investment strategy document that outlines the sectors in which India shares complementarities with key trading partners. It must provide clarity on the future of trade policy moves, and explain the rationale behind past policy changes. Our official trade policy documents focus too much on aspirational targets, and too little on the strategy and tactics needed to achieve them.

Millions of business owners across the country have very little understanding of how and why India’s trade policies are shifting. Ad hoc shifts in trade policies — whether it be a rise in input tariffs or investment restrictions — hit them hard, and make it difficult for them to compete in global markets. Only the large politically networked conglomerates are able to detect which way the economic policy winds are blowing in Lutyens’ Delhi and are able to place their bets accordingly. Greater transparency in formulating strategic and trade policies will help narrow the information gap between big firms and the rest.

Lowering discretion in trade policies will also help. Where discretionary changes are made, the costs and benefits of such policy changes must be analysed, and subjected to public scrutiny. If a rise in steel tariffs raised the profit margins of domestic steel producers but eroded the profitability and export growth of car manufacturers (that use steel as an input), the net benefit (or cost) to the economy must be estimated and published. Such estimates will help us understand how a tax on imports can often end up being a tax on exports. Greater awareness about the pitfalls of knee-jerk protectionism might bring about predictable trade policies for firms with cross-national links.

The current geopolitical moment is to India’s advantage. But India’s economic statecraft needs a serious upgrade if we are to make the most of this opportunity. India cannot become a key node in global supply chains with a timid and inchoate trade policy regime.

Pramit Bhattacharya is a Chennai-basedjournalist. The views expressed are personal

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