Protectionist mindset limiting trade gains

Sushma Ramachandran

Senior Financial Journalist

The bonhomie of the Modi-Biden summit may have been low key but there are great expectations, both on the strategic front as well as the stalled area of economic relations. The latter has even more contentious issues than the former. Expanding trade and technology ties may have been highlighted as one of the big hopes from the meeting, yet there could be limited success here.

Bilateral trade volumes have grown over the years but the hurdles in the way of a sharp acceleration seem to be mounting rather than the reverse. The result is that China has displaced the US as India’s biggest trade partner in the last fiscal.

In this backdrop, much more needs to be done to smoothen over the many rough patches in trade ties that have stubbornly refused to disappear over the years. These include non-tariff barriers, the lack of alignment in international quality standards and a perceived failure to provide access to this country’s huge market. The market access constraints have been a perennial complaint of successive US administrations.

A new dimension has been added to the plethora of differences between the two countries, with the US having apparently indicated its lack of interest in a bilateral free trade agreement (FTA). The prospect of such an FTA was avidly discussed during the Trump administration’s tenure but no positive decisions were taken. There was some talk of a mini-trade deal but this too fell through.

Clearly, it has been accepted that the chasm between the two sides is too wide to be bridged right now through a bilateral agreement. Though Commerce Minister Piyush Goyal has called for moving forward on other fronts, the American disinterest in an FTA has been a disappointment at a time when India is trying to forge more regional trade pacts.

Significantly, Goyal also cautioned the industry that seeking market access abroad would mean a reciprocal opening up of markets here. Whether this means that the gradual rise in protectionist tariffs since the NDA assumed power will be reversed is yet to be seen. But there is no doubt that if India wants to integrate into the global value chains, it will have to halt the creeping rise in tariffs that is adding costs to the economy. The economic benefits of being a part of the Quad grouping will also be negated unless there is a serious effort to open up the domestic market to Japan and Australia, along with the US.

Greater access is at the core of the Quad’s plan of technology cooperation in the area of semiconductors — the ubiquitous chips at the core of all technical goods that are taken for granted nowadays. The global chips shortage, combined with the fact that the biggest producer, Taiwan, is facing the threat of takeover by China, has pushed this item onto the priority list for the Quad. Complementarities in technological expertise, manufacturing capabilities and engineering skills among these four countries can successfully create a global supply chain for semiconductors.

The question is: will this government put its atmarnirbhar policy and related protectionist approach aside to become a part of this value chain?

The answer has to be in the affirmative if it is to become an integral part of the Quad’s semiconductor supply chain initiative. The initiative has arisen from the recognition that national self-sufficiency does not work in this sector. The four-country grouping has even gone on record to call for a diverse and competitive market, a comment based on the fact that semiconductor production is typically spread over several countries. In case the initiative succeeds, it will enable many countries to emerge out of the stranglehold of dependency on China or the beleaguered Taiwan for their critical chip supplies.

Till now, India has not played a pivotal role in the global value chains that are fuelling trade flows around the world. One reason, according to a recent survey by consulting firm Deloitte, is apparently the fact that the lure of coming to this country for many investors is its vast internal market.

Multinational business leaders, especially from Japan, are interested in investing here despite the current economic downturn, but purely to supply to the domestic market, and not to make India a springboard for exports.

This perception needs to change and the Quad’s semiconductor initiative could be the starting point in case it leads to removal of the current protectionist mindset.

What is interesting, however, is that foreign direct investment inflows have been surging in spite of the 7.3 per cent contraction in growth during 2020-21. These rose by nearly 10 per cent from $74.39 billion in 2019-20 to $81.72 billion in 2020-21. And this, when global FDI flows fell from $1.5 trillion to $1 trillion over the same period.

This is all to the good, but these inflows are not aimed at making India a part of the global value chains, as that would need both reduction in tariff barriers as well as measures to improve the ease-of-doing business. In the absence of such policy changes, the Deloitte survey indicates that Vietnam and Indonesia score higher as investment destinations than India among the global corporate leaders.

For India to reap the benefits of the summit-level camaraderie with the US as well as other Quad partners, there needs to be a fundamental shift in policy. When the Modi government assumed power, deep and wide-ranging economic reforms were expected to be put in place. Instead, there has been an incremental gradual approach in many areas. Then came the atmanirbhar policy which actually represented a step backward into the era of protectionism.

One can only hope the policy will be sidelined for a more pragmatic approach in line with the recent initiatives to reverse the retrospective tax legislation and provide support to the flailing telecom sector. A fresh approach has been taken lately towards moribund economic policies, even if rather late in the day. This approach needs to be extended to trade and technology. Otherwise, the prospect of positive outcomes from the Quad summit may be non-existent.

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