India's diffidence in signing up for trade deals

No Give, No Take: Lack of competitiveness has made India less confident in signing up for trade deals

Over the last week or so, India has been in international news for two major happenings. First, India suffered a setback at the World Trade Organization (WTO) in a trade dispute with the US which challenged India’s key export subsidy schemes, including one for special economic zones. The WTO’s dispute resolution panel ruled that India’s export subsidy programs violate WTO trade provisions and fall under the list of prohibited subsidies (offered in the form of exemptions from customs duties, deductions from taxable income, etc). Though India is likely to appeal the ruling in the Appellate Body, from a domestic perspective, the WTO ruling is likely to affect the government’s aggressive push to incentivize exporting industrial units through subsidies.

The second happening was India’s eleventh-hour decision to pull out of the Regional Comprehensive Economic Partnership (RCEP).

A bird’s-eye view of the issue suggests that, in the current circumstances, it was perhaps better for India not to join a plurilateral trade agreement like the RCEP, where the existing terms of trade, with tariff structures given in the agreement, were likely to adversely affect the country’s domestic production channels across sectors (and thus fail to promote an efficient trade partnership with the other signatories).

At the same time, any reason not to join the RCEP -- one of the largest trade blocs (given its market and member-nations’ population size) -- must not be seen as a justification for India to move to a protectionist mode or be subjected to pressures of lobbying business groups.

Rather, this decision must be seen as an opportunity for the government to reflect on India’s poor trade competitiveness levels, especially in the commodity markets (and their exports), and work on how these can be enhanced, vis-à-vis other regional and global trade partners. This issue has made it extremely difficult for India to participate in large, competitive trade partnerships.

In India’s current economic scenario, a poor level of trade competitiveness remains a culmination of two critical factors: a weak demonstrable manufacturing strength, and an uncompetitive currency-pricing mechanism for the Rupee vis-à-vis other emerging market currencies.

In fact, since the reforms of the early 1990s, India has faced some structural challenges in prioritizing both these aspects to sustainably enhance its trade competitiveness. On the other hand, countries like Bangladesh, Vietnam, Indonesia, Thailand, to name a few, have done way better in aligning an export-oriented industrial vision with a set of policies that make their products and their costs competitive at a global level.

In the case of RCEP, too, one of the key issues that prevented India from getting on board included ‘inadequate’ protection against surges in imports. Though a number of countries within the RCEP expressed a desire to have India in the grouping, ostensibly to help contain or manage a dominant country like China. Still, India’s own comparative weakness in terms of trade and competitiveness levels triggered a fear of how Chinese commodity products would ‘flood’ Indian markets.

At the same time, there were other pressing issues for India in the trade agreement: regarding India’s request for added provisions for more trade in services; an assurance for better market access for Indian products in China and making 2019 the base year for tariff-reduction calculations.

Further, India has also been trying to develop (and negotiate) an auto-trigger mechanism that would allow it to raise tariffs on products in instances where a basket of imports from a given nation crosses a certain threshold. This, too, was not accepted by many RCEP members.

Still, the real question is: How can India focus on improving its trade competitiveness levels?

Enabling competitiveness for Indian products and services across regional and international markets would require a set of both ‘market’ and ‘extra-market’ arrangements, which would allow the government to push for higher manufacturing growth and opportunities for domestic industrial enterprises to scale up exports.

Market-centric measures would require a set of liberalizing measures, with incentives for cross-border trade, reforms in factor markets (land, labour in particular), that allow enterprises to increase production for export. In complementarity, extra-market arrangements would require fiscal and other targeted socio-legal forms of interventions to make the business outlook of Indian firms -- including those entering new markets -- more globally aligned.

It must be mentioned though that there is little possibility for India to experience a more rapid export-oriented pattern of industrialization -- as seen in East Asian economies like South Korea and Taiwan in the 1970s and 1980s.

However, there is still a critical need and economic case for the government to continue its focus on stronger manufacturing capacity for trade that brings positive returns in domestic employment creation while also attracting foreign direct investment into manufacturing. The auto industry in India, which grew since the pro-market sectoral focus in the 1990s, is a case in point.

Further, for greater trade competitiveness, a strong manufacturing capacity requires a competitive Rupee. In comparison to China, over the last decade, we can observe how India’s exchange rate has appreciated over time (primarily due to the influx of foreign capital), while China has managed to maintain an undervalued Renminbi to make its currency (and its products) cheaper and more competitive in export markets.

While the underlying factors affecting the volatility of exchange rates may differ from one country to another, it is possible for India to strategically manage exchange rates and keep them in alignment with the country’s production patterns, as seen in the case of China and other countries. For example, currencies of other emerging countries like the Philippines and South Korea have seen a drop in their real exchange rate value since 2013, which has allowed their products to become cheaper and more competitive in the global market.

Going forward, it will be vital for both the Indian government and the Reserve Bank of India (RBI) to ensure a more favourable INR-USD exchange rate for goals of higher trade competitiveness.

Ensuring higher competitiveness in production remains key to India’s ambitions in not only expanding its market integration with other countries within the region, but to also use a higher export-oriented industrial vision to boost employment in labour-intensive modes of business production at a time unemployment rates have soared in the last four-five years.

For India to actualize its global economic aspirations, it is vital that it signs on to trade agreements that represent mutually beneficial terms of trade, and at this juncture given that the economy is witnessing a chronic economic contraction, perhaps India was correct in staying out of RCEP (based on the current content of the trade agreement).

Still, without a competitive Rupee and a strong manufacturing sector (enabled through structural reforms guided by market principles), it is more likely that India’s performance in exports and overall current account position may only further weaken in the years ahead. And this will only make its own economic vision and goals for foreign policy more exclusionary in nature by being skeptical towards critical regional trade partnerships.

(The writer is Director, Centre for New Economic Studies, OP Jindal Global University, Sonepat, Haryana)