What India needs to do for bigger role in world trade

TRADING with foreign countries has been an ancient activity in India. Even under colonial rule, when the economy deteriorated rapidly, foreign trade with neighbours, including China, continued apace. Despite this centuries-old tradition, foreign trade has been the weakest link in the country’s economy for many decades. There seemed to be a revival recently as merchandise goods exports reached a record $450 billion in 2022-23. But this was mainly due to a surge in global demand after the pandemic, and the boom period is now clearly over. Latest reports show a 22 per cent drop in exports during June, reflecting the sluggishness in a global economy plagued by inflationary pressures and tight monetary policies.

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On the positive side, services exports continue to be buoyant. This is an aspect of Indian trade that has defied declining trends and looks set to continue in the medium and long terms. A recent Morgan Stanley study says the country’s share in world services exports has hit an all-time high of 4.9 per cent, powered largely by software services. Business services, however, are also playing a role and account for 24 per cent of the total exports compared to 46 per cent for software services.

In sharp contrast, merchandise trade seems to be wholly dependent on demand spikes in key developed country markets like the US and Europe. India’s share of the world goods trade thus remains at a minuscule level of about 2 per cent, lower than small countries like Ireland. Comparisons of current growth rates are being made with China, but our neighbour is way ahead on the trade front — China commands a 12.5 cent share of international trade, the largest of any single nation.

But a question remains — what ails Indian exports, given that there is a fairly large domestic industrial base? It should thus be possible to play a far more expansive role in world trade. The first problem, if it can be called so, is the availability of a large home market. This makes it easier for manufacturers, especially small and medium enterprises, to cater to the captive market rather than face the rigours of unfamiliar foreign shores. There are few industries that focus completely on exports and some of these are traditional sectors. Readymade garments, handicrafts and gems and jewellery are among the areas that rely largely on exports. This is not to say that manufactured goods are not being exported in a big way as pharmaceutical and engineering goods as well as refined oil products also occupy a big share of the export basket.

Yet, most industries turn towards exports only when the domestic market is saturated or surpluses are available for sending abroad. In other words, the domestic industry does not automatically gravitate towards exports.

A second long-term lacuna has been the failure to become a part of any large regional trade grouping. Hopes had been pinned for too long on the World Trade Organisation to provide benefits to emerging economies while the opportunities to join either regional or bilateral trade pacts have been repeatedly bypassed. The decision to withdraw from the Regional Comprehensive Economic Partnership (RCEP) was undoubtedly taken with great deliberation and concern over a possible flood of cheap Chinese imports entering via third countries. Yet, proactive measures needed to have been taken long ago to enter into other regional trade groups. The 11-member Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is one such example of a large trade pact that would be useful to provide support to the country’s export efforts. Even now, efforts can be made to join this group, which has included Australia, Japan and Malaysia but carefully excluded China.

As for bilateral trade pacts, one of the most important with the European Union was allowed to remain suspended for 10 years. Talks have resumed only recently with a region that is one of India’s largest trading partners. Fortunately, there seems to have been recognition lately that it is in the country’s interest to enter into more such free trade agreements (FTAs). This must have been the impetus behind concluding the ones with Australia and the United Arab Emirates, while others with the six-member Gulf Cooperation Council and a critical one with the United Kingdom are now being pushed with an aggression that was lacking in previous years.

The FTA with the European Free Trade Association (EFTA) that had been put into cold storage seven years ago has finally been revived with recognition that dialogue is the only way forward even on contentious issues. Non-trade-related subjects such as environment, labour and digital trade are now being negotiated to get a better deal for the country. In the case of EFTA, the benefits could be in terms of easier access for skilled professionals in a region which includes high-tech powerhouses Switzerland, Norway and Iceland, apart from Liechtenstein.

And finally, one of the obstacles to higher export growth has been a protectionist mindset that has grown in recent years. While import tariffs of China and Southeast Asian nations are considerably lower, the export performance of these economies is also far better. There is thus no correlation between higher import tariffs to protect the domestic industry and buoyant exports.

The time has come to shed old shibboleths about protectionist import barriers. Indian industry has come of age and is resilient enough to face competition from foreign manufacturers. Support to the domestic industry is already being given in terms of new programmes like the production-linked incentive (PLI) schemes. These are far more effective in giving a boost to the manufacturing sector than merely trying to make imported products more expensive. The ‘atmanirbhar’ policy brings back memories of the old import substitution regime that was the cornerstone of the Licence Raj era. There is already a creeping rise in average import tariffs which are currently double of those in China and Southeast Asian economies. This is a trend that needs to be reversed if India is to once again play a significant role in the world as a major trading nation.