UNFLATTERING

India must move quickly to fix a looming trade crisis

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Quartz india
Obsession
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Quartz india

The Narendra Modi government’s trade policy has been marked by five noteworthy, but rather unflattering, trends: declining trade volumes, unsuccessful diversification of trade destinations, continuing deadlock in US-India commercial ties, India’s services strength remaining under-utilised in trade agreements, and lack of a national strategy for mega trade agreements.

This then shapes the government’s trade agenda for the next three years.

The first element, the dismal state of India’s trade, impacts Indian industry. In the two years of the current government, exports have contracted by almost 17%—from $314.405 billion in fiscal 2013-14 (April 2013 to March 2014, a couple of months before Modi and his Cabinet were sworn in) to $261.136 billion in 2015-16. Even imports have dipped by a considerable 16% during the same period: from $450.12 billion to $379.6 billion.

To be fair, exogenous factors are behind the drop. The global slowdown has eroded demand for manufactured goods. But, while global trade in 2015 expanded—albeit marginally, by 2.8% (pdf)—India’s trade shrunk. In addition, lower commodity prices have impacted volumes and values for both exports and imports. However, the fall in imports has another worrisome aspect—it could signify lower demand for raw materials and intermediate products from Indian manufacturing sector. Combined with lower merchandise exports, which also affects broad swathes of industry, contracting trade volumes adversely impact employment, incomes, investment, consumption, and economic growth.

Year Exports ($ billion) Imports ($ billion)
2013-14 314.4 450.2
2014-15 310.3 448
2015-16 261.1 379.6

Undoubtedly, trade performance has to be improved urgently. One reason for India’s continuing indifferent trade performance is lack of integration with regional and global supply chains. Foxconn’s decision to set up a handset manufacturing unit in India is an improvement, but it will require many similar initiatives to markedly improve India’s trade profile.

This brings up the second aspect. India has been trying for some years to diversify its export destinations, away from the developing countries of North America, Europe, and Japan where demand and consumption levels have dropped appreciably. India saw in Africa a key trade and investment partner and fixed a $90-billion trade target for 2015. It finalised similar trade targets with ASEAN, other regional groupings, and individual countries. Unfortunately, most of these trade targets remain unattainable.

For example, trade between Indian and Africa fell short of the $90-billion target—two-way trade dropped from $71.5 billion during 2014-15 to $56.67 billion by 2015-16. One of the reasons for the shortfall is the steep drop in commodity prices, leading to the oil import bill from Nigeria (India imports about 15% of its oil from that country) shrinking. However, that still does not explain the lack of a concerted thrust at creating alternative markets for Indian goods and services in either Africa or Latin America. It’s not too late, given India’s strategic and civilizational ties in these two continents.

The third facet is a visible pivot over the past two years towards a more intense trade and investment relationship with US, though the results are mixed.

India’s engagement with US froze under UPA-II regime. However, the past two years have seen considerable energy invested in the relationship. Trade ties between the two nations are conducted through the Trade Policy Forum (TPF, set up in 2005), under the broad rubric of the US-India Strategic and Commercial Dialogue. The forum’s ninth meeting was held in October 2015 and like other previous rounds, the outcome remained wedged between on familiar issues—agriculture market access, intellectual property rights, trade in goods, and services. Strategy firm Albright Stonebridge Group comments: “Will the TPF continue to be a talk shop where issues are raised, discussed and shelved for discussion next year…Over the last few years a meeting would be called successful if both sides simply showed up to the meeting at the agreed place and time, discussed the agenda and closed by agreeing to disagree.”

One of the perennial sticking points in the India-US trade negotiations is services, the fourth pillar of India’s trade profile and unarguably a competitive advantage. The Economic Survey for 2015-16 states: “WTO data shows that India’s services exports grew from $16.8 billion in 2001 to $155.6 billion—which constitutes 7.5% of the GDP—in 2014, making the country the eighth largest services exporter in the world. The share of India’s services exports in global services exports at 3.2% in 2014, is nearly double its share of merchandise exports in global merchandise exports at 1.7%.”

But, India has failed to utilise this competitive trade advantage, specifically cross-border movement of professionals, in various trade agreements.

For instance, India signed a Free Trade Agreement (FTA) with ASEAN for goods first, and then followed it up five years later with a FTA on services. In the interim, India suffered a negative trade balance given the SE Asian region’s superior manufacturing capability and integration with global supply chains. Strategically, if India had signed an FTA for both goods and services simultaneously, the outcome might have been different.

The past lessons seem to have been learnt and, in various FTA talks, India is now insisting on inclusion of freer movement of professionals in return for demands to lower customs tariffs.

The fifth corner of India’s future trade strategy relates to mega trade agreements. The largest—Trans Pacific Partnership—promises to change how trade is conducted. India and China are noticeably absent from the pact; in fact, if the other mega agreement under discussion (Transatlantic Trade and Investment Partnership, between USA and Europe) is finalised, India and China could find themselves in trade hibernation.

Opinion is divided (pdf) on whether India should join TPP, even though scholars are unanimous that such mega agreements will definitely result in trade diversion for India. Excluded by both TPP and TTIP, India has now set its eyes on completing the Regional Comprehensive Economic Partnership (RCEP), a trade and investment agreement between ASEAN members plus India, China, Japan, South Korea, Australia, and New Zealand. Simultaneously, president Obama is pushing for India’s membership in Asia Pacific Economic Cooperation, a 21-country regional economic forum. In fact, APEC membership is a stepping stone for TPP inclusion.

India’s strategy on mega agreements should be to first conclude RCEP without compromising on its strengths. Alongside, India should also try and finalise FTAs with individual states, such as Australia. At the same time, the government must initiate a broader public discussion on India’s trade strategy, specifically to clarify the country’s stand on TPP and its focus on “beyond-border” issues, such as domestic labour laws or environment rules.

This post was first published on Gateway House. We welcome your comments at ideas.india@qz.com.

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