Another area where Modi’s budget disappointed: Economic diplomacy

None of this in the budget.
None of this in the budget.
Image: Reuters/Paulo Whitaker
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Soon after he was sworn in as prime minister, Narendra Modi invested India’s languishing economic diplomacy with a renewed energy. It was therefore widely expected that budget 2015 would achieve strategic convergence with Modi’s vision of using economics to drive India’s foreign policy.

But the budget seems to have achieved that only partially.

Economic diplomacy has a two-pronged role in the Indian economy. One, to open up markets  for Indian goods, services and investments, with special emphasis on widening and deepening India’s footprint in neighbouring countries and newer markets like Africa and Latin America. Two, Modi’s whirlwind foreign engagements in the first eight months of his premiership were also focused on attracting foreign inward investments—from governments as well as the private sector— to further invigorate his “Make In India” programme.

On the first count, the budget is conspicuously silent. It is on the second that the budget holds out some hope.

The silence in the first instance is surprising. With the US, European and Japanese economies—which have also been India’s traditional export markets—still struggling to break out of a low-growth trap, it is imperative for India to create a beach-head in newer markets for its goods, services and investments. Post 2008, India was forced to look to Africa and Latin America to maintain export buoyancy. But, both continents together account for a paltry 15% of India’s total exports and there is nothing strategic in this budget that indicates a desire to achieve higher numbers.

Modi’s foreign policy priorities have also included a renewed thrust on India’s immediate neighbourhood—countries in both the South Asia Association for Regional Cooperation (SAARC) and Association of Southeast Asian Nations (ASEAN). Barring the announcement of a project development company to help facilitate Indian private sector investments in Cambodia, Myanmar, Laos and Vietnam (CMLV), the budget is bereft of any meaningful strategy. For example, there is no mention of, or funding allocated to, linking India’s North East to ASEAN through an all-weather transport corridor, an issue that has been discussed and accepted. Even with CMLV, there is no clarity on the investment-absorbing capacity of the individual countries or the kind of sectors Indian companies can focus on.

The budget’s commitment to economic diplomacy is also reflected in money kept aside for various ministries. Budget allocation for 2015-16 under the head “Technical & Economic Cooperation with Other Countries and Advances to Foreign Governments” in the ministry of external affairs (MEA) is up by 25.88%. But when compared with the original budget estimate, the allocation is actually down by about 3.5%. Worse, the budgetary outlay for the department of commerce in the ministry for commerce and industry (the bulk of which is earmarked for foreign trade and export promotion) for 2015-16 is lower than both the revised and budget estimates for 2014-15.

Another missed opportunity is the Indian Technical and Economic Cooperation (ITEC) programme, a key instrument of India’s development diplomacy which is administered by the MEA. Despite its popularity, it’s allocation at Rs180 crore for 2015-16 is just 16% higher than the actual expenditure last year.

An argument can be made that given the shrinking fiscal space for the centre, and the pressure to kickstart growth impulses through public spending, little is left to spare for economic diplomacy. However, that logic is self-defeating because the gains to economy—both in terms of growth and revenue—from accelerated geo-economic strategies is well known.

What makes these lapses doubly alarming is the grim future scenario for India’s trade regime outlined in the Economic Survey, which was released by chief economic advisor Arvind Subramanian only a day before the budget announcement.

The survey singles out three main challenges: The phenomenon of unbundled and geographically dispersed global value-added manufacturing chains into which India has integrated slowly, the imminent rise of two large trade blocs (Trans-Pacific Partnership with Asia and Trans-Atlantic Trade and Investment Partnership with Europe) which will cover half the world’s trade and China’s emergence as a major voice in trade negotiations. India, says Subramanian, has only two choices: Measured integration (an euphemism for status quo) or ambitious integration, which will require India joining the TTP (currently a remote possibility). The flip sides to both options are that measured integration will leave Indian exports isolated, while joining the TTP will require substantial liberalisation which may be out of alignment with domestic level reforms.

As China did during its entry to the WTO in 2001, India can forcefully dovetail the domestic reforms agenda to an external priority. But the country’s competitive democratic politics and the presence of varied interest groups makes that task exceedingly difficult.

But, to be fair, finance minister Arun Jaitley has introduced many measures to attract fresh investment into manufacturing and services. These moves may not be headline-grabbing, but are a nuts-and-bolts policy framework: they seek to improve the ground conditions for attracting investments, facilitate efficient use of financing, eliminate legal obstacles that inevitably lead to disputes and prolonged legal battles, simplify processes and stabilise the tax regime. There seems to be a realisation in the budget, as well as in the railway budget of February 26, that investors—whether domestic or foreign—are unlikely to part with their money unless the ground conditions are improved substantially.

The specific measures introduced by Jaitley—heeding the advice of the Economic Survey—include eliminating distinctions between different categories of foreign investors, one-source clearance for regulatory approvals, easier dispute settlement mechanisms, broadening scope of investment vehicles for foreign capital, providing tax clarity and stability.

Hopefully, the oversight in providing the budget with a strategic edge through geo-economics will be corrected in the quinquennial Trade Policy 2014-2019, which is already delayed and is likely to be announced soon by commerce minister Nirmala Sitharaman.

This post first appeared on Gateway House.