Trade isolation

Even as economic activity is recovering from the Covid-induced shock, the Indian economy is widely expected to end the current fiscal year with a 7.5 per cent contraction. While the next year will see a sharp rebound because of the lower base, it is not obvious that India will return to a higher growth path in the medium term. One important reason why attaining higher sustainable growth will be difficult is India’s stance on trade. Indian exports continue to underperform. While its outbound shipments fell by 9 per cent in November, for instance, China witnessed a growth rate of over 20 per cent. India’s exports are also lagging behind countries such as Vietnam and Bangladesh.

On the policy front, it appears that India is now unwilling to join the Regional Comprehensive Economic Partnership (RCEP), even at a later date. Members of the group signed the agreement last month without India. Most economists had advised the government against pulling out of the trade bloc. The RCEP is the largest trading bloc and, perhaps, the most dynamic in the world. The participating countries are estimated to have generated about 30 per cent of global output in 2019, and it is projected to go up to 50 per cent by 2030. In terms of trade, the RCEP members imported goods worth about $5 trillion in 2019, compared to $3 trillion by North America. The share of the RCEP countries in global trade has been rising over time. It is in this context that the opportunity cost of not joining the trading bloc should be viewed. In fact, India’s policies are becoming more protectionist and inward-looking. Tariffs, for instance, have been raised for about 70 per cent of imports since 2014. Higher tariffs and protectionist policies will make India a high-cost economy. As a result, competing in global markets would become increasingly more difficult for Indian firms. India is now protecting parts of the manufacturing sector with production-linked incentives.

The importance of integrating with the global value chain (GVC) to increase trade is now well established. But this would not be possible with higher tariffs and other restrictions on imports because GVC requires rapid movements of goods. Predictably, India’s participation in the value chain has declined. Further, it is important to recognise that investment will be driven by trade. Multinational corporations would prefer countries that are more open to trade to take advantage of the value chain. This is not to suggest that India will not get any investment. But it would be limited, largely targeting domestic consumers and, possibly, some exports. The bottom line is that India is isolating itself and this does not augur well for long-term growth. Lowering trade barriers after the 1991 reforms helped India attain higher economic growth.

To be sure, India runs a trade deficit with most RCEP countries and needs to improve competitiveness. But this will not happen by raising tariff walls. The RCEP provided the opportunity for adjustments. It is now being argued that India will work on trade agreements with the US and the European Union. But such deals are not in sight and conditions are unlikely to be more favourable than the RCEP. As a matter of fact, after having not joined the RECP, India will not be able to negotiate from a position of strength. India is tying itself with ill-considered trade policies and needs a comprehensive review before it loses yet another chance of rapid economic growth.

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