For the last two decades there have been dramatic shifts in the global trade landscape. We now have the emergence of:
- Global Value Chains (GVCs) that have taken over from the production of goods to tasks with services and technology embedded in them. Most exports are going through this process, which offers all countries - developed and developing, big and especially small - opportunities to participate in and link up with these GVCs.
- Mega-regionals, some with trade policy rules that are WTO++. We now have three mega-regionals - Trans-Pacific Partnership (TPP), Transatlantic Trade and Investment Partnership (TTIP), and Regional Comprehensive Economic Partnership (RCEP).
- The increasing influence of Asia vis-à-vis the industrialised world, with China clearly taking the distinct lead in the BRICS Bank and the Asian Infrastructure Investment Bank (AIIB) to counter the US, the World Bank and the ADB.
The Government of India can transform the PM's 'Make in India' initiative into a big opportunity for growth and employment in this changed global trade scenario for the reasons summarised below:
- We have a very dynamic services sector - professional services; and a very remarkable technology capacity which are essential for task-oriented GVCs.
- We are yet a small player in GVCs with much room to grow. Our MSMEs hardly participate in GVCs unlike in South East Asia, China, Korea, Japan, Mexico and some East European countries.
- The same is true for levels of FDI, especially efficiency-seeking FDI linked to creating a hub in India, which is at a dismally low level. Most of our FDI is market-seeking, catering to a large domestic market.
- India is ideally placed to be a supply-chain hub given its proximity to fast-growing South East Asia and East Asia.
- Most importantly, we have a new government that has embarked upon an outstanding foreign policy which just needs to be complemented with the next-generation trade and investment reforms.
However, we need to move away from just sloganeering to actual policy reforms to seize this window of opportunity which I will highlight in this article. Before doing so, I wish to clear some confusion surrounding 'Make in India':
- 'Make in India' is not for import substitution but for export promotion of tasks. It is not just 'Make for India'.
- Essentially it must create a competitive hub linking up with both international and national value chains.
- It is not just for manufacturing, but for embedded services and technology, which is consistent with GVCs.
- Labour-intensive MSMEs armed with services are the missing link that will play a major role in this process and help attract FDI, to create a competitive value chain hub and generate employment. This is the experience of highly successful SE Asian and East Asian countries.
What needs to be done for 'Make in India' to succeed? To better connect it to GVCs:
- We need to complete Trade and Logistics Facilitation reforms - beyond WTO TFA. We need to implement the remaining recommendations of the report of my 2004 MoF Working Group on Trade Facilitation immediately.
- Improve Doing Business indicators with a focus on removing the massive transaction costs to allow a level playing field for MSMEs and help them attract FDI, since they are short of both investment funds and technological know-how.
- MSMEs will then create much-needed jobs (according to an IFC study, 43 per cent of jobs in the emerging markets come from MSMEs).
- Diversify professional services beyond IT and ITES to accounting, engineering, architecture, design, product development, legal and medical services.
- Promote skill development in labour-intensive services. The changing landscape of IT and ITES requires far greater emphasis on a diverse range of expertise and domain knowledge than mere programming that call-centres ask for. The government and the private sector together would have to convert India's large output of natural science, arts, and commerce graduates into employable resources in the diversified professional services sector.
- Simplify the tariff structure, encourage easy import of inputs/intermediates, and reduce tariffs on them.
- A regulatory environment that is attractive to FDI in manufacturing with emphasis on national single windows, and timely decision-making.
- A taxation system that ensures that no domestic taxes are exported (i.e. zero-rating of exports) and, most importantly, speedy introduction of GST.
To ensure 'Make in India' is well-placed to face the Mega-regionals:
- Given the current global scenario, it would make sense for India to look to a deeper regionalism that incorporates the 21st century trade negotiating mandate. This would mean re-working its trade engagement with SE Asia and replace existing shallow agreements with those that have a wider mandate, as well as simultaneously consider joining, or at least being ready to conform to TPP's evolving gold standards in trade policy, so that India is not left out of the largest global supply chain, more so since TPP will link up with the TTIP. We need to participate simultaneously in RCEP, but fully realising that it will not call for upgrading trade policy standards beyond WTO, and most prominent members are in or will join TPP. Even China has begun its exercise to conform to the envisaged TPP standards.
- The entire focus now should be towards a link to regional supply chains of ASEAN countries. This will require policies to attract FDI that would help create these regional linkages. Essentially, trade negotiations would have to be complemented by greater focus on domestic reform, i.e. business facilitation to create a more competitive and diverse manufacturing base in India, creating more opportunities to find a niche in the regional production network.
- The critical element of this regionalism is connectivity. Connectivity would not only encompass road, rail, air, and sea linkages but also linkages between Indian and Southern Asian energy networks (pipelines and electricity grids). It would also include institutional mechanisms to facilitate movement of people (thus enabling services trade), customs and other regulatory harmonisation, and liberalisation of education, health, banking and financial services.
We need the US and China both. It would be foolish of us to ignore the centrality of our cooperation with the US even as we continue our efforts to normalise our relations with China. The US and China, in that order, are the two most important countries in India's global perspective. We need to keep that perspective in mind when we consider our role in the BRICs Bank and the AIIB vis-a-vis the World Bank and the ADB.
Again, our foreign policy is rightly moving in these directions with the visits of the PM to USA and the immediate return visit of President Obama to India, and the visits of the PM to China, Japan, South Korea, Brazil, France and Germany on top of his most successful visits to Bangladesh, Sri Lanka, Nepal, Bhutan, and Myanmar amongst our neighbours. We are indeed well-poised to be a major GVC hub. We just need the policies.
We can be a major global player very soon by transforming 'Make in India' into the policy reform package outlined here. But the tasks are not easy and we need to start working on them immediately. Time is running out.