Changing economic order

India needs to do more to tap global markets

India is on track to attain the $400-billion export target this fiscal year. Exports jumped to $33.44 billion in September, registering 21.35 per cent year-on-year growth. India is clearly benefiting from a stronger-than- expected recovery in international trade. According to the United Nations Conference on Trade and Development, the value of global trade in 2021 is expected to be about 28 per cent higher than last year. Compared with 2019, it is likely to go up by 20 per cent. These are strong numbers but may not sustain for long. International trade has been under pressure for several years and the pandemic has only exacerbated the fault lines. While the pandemic was a truly global crisis, the response was mostly national and inward-looking. Shortages of a variety of items, including medical supplies, during the pandemic will shape economic and trade policies in large economies.

It is likely that the real picture will emerge once the global economy stabilises and corporations are finished with replenishing their inventories. Large economies are reconsidering their dependence on international supplies and would aim to build domestic capacity. Corporations are also re-evaluating the resilience of supply chains. All this may affect global trade and growth over the medium term and hasten the trend of de-globalisation.  trade openness came under significant pressure after the 2008 financial crisis. The trade openness index, which was steadily rising in the post-war period, for instance, started declining after 2008. The reversal could be attributed to a number of factors. As Douglas Irwin of the Peterson Institute for International Economics noted in an article on the de-globalisation trend last year, the growth of global value chains has flattened, and reforms are stalled all over the world.

Further, China, which has been a driving force for trade and growth in recent decades, started looking inward. Although it is still a dominant exporter, exports as a percentage of gross domestic product (GDP) have fallen from over 30 per cent in 2008 to under 20 per cent. Trade tension between the US and China during the Donald Trump years also contributed to the process. Strategic rivalry between the two and the evolving geo-political environment would continue to undermine economic openness. Besides, institutions governing the global order are also under pressure. Therefore, given the global environment, it is safe to assume that the world is unlikely to return to the pre-2008 economic openness in the foreseeable future.

India will thus need to prepare accordingly and should not get carried away by the current year’s export numbers. It will not be able to attain higher sustainable growth without higher exports and policymaking should be guided by this basic economic reality. However, this would warrant a review of the current trade policy. India has increased tariffs in recent years, which has direct implications for exports. According to the World Bank data, exports as a percentage of GDP have fallen from a high of 25 per cent in 2013 to about 18 per cent in 2020. This needs to be reversed. India also decided to stay away from the Regional Comprehensive Economic Partnership, which will affect longer-term trade prospects. It is negotiating free-trade agreements with a number of countries, but the outcomes remain uncertain. India will need to do more to tap global markets. In the absence of a focused approach in the changing global environment, longer-term growth prospects are bound to suffer.