Jayanta Roy: India and the anti-globalisation brigade

Developing countries have benefitted greatly from globalisation

The developed world’s trade landscape is undergoing a sea change with Brexit, Trump’s stunning victory and a growing importance of anti-trade and anti-immigration policies also in Germany, the Netherlands and France. India, in the past decade, riding high on the tailwinds of high global trade, and later on falling oil prices, had not integrated fully with the global economy. It experienced no strain in the balance of payments despite dwindling exports. But now India is facing the headwinds of protectionism, anti-immigration, high interest rates in the US, and rising oil prices which are going to further dampen our exports of goods and services, and even remittances. Reviving the lost export momentum is the only way out of this impending BoP crisis. Unfortunately, there is a strong anti-globalisation sentiment among policy-makers and industrialists in India that has been further strengthened by the recent anti-globalisation drive in the US and parts of Europe. There is no talk in policy circles in the government and outside on the need to focus on trade reforms to revive export growth. This benign neglect of trade policy must give way to urgent implementation of the next generation trade reforms which are vital to regain export momentum, high sustained growth and job creation. India, with its low share of world exports, is in a strong position to boost exports even in this depressing global scenario.
 
The developed countries’ anti-globalisation move is the result of low growth, low employment, and growing inequality. Developing countries, on the other hand, benefitted greatly from globalisation. The success of China and the Southeast Asian countries testifies to that. These countries adopted trade reforms to focus on linking its manufacturing and services to global value chains to boost exports, growth and employment. With the development of fragmented production networks and the rapid evolution of a global consumption and production system managed by multinationals, trade barriers that directly impact this global production and consumption supply chain are rapidly growing in importance.
 
Tariffs are no longer the primary barriers to trade. The critical challenges relate to non-tariff barriers, both at the border and behind the border, and issues related to trade facilitation, that is, the cost and efficiency of logistics due to both poor regulation and/or poor infrastructure. Unfortunately, India is yet to recognise the importance of these barriers, particularly those that involve reducing trade transaction costs, streamlining regulations, promoting trade and investment in professional services, and strategic regional integration to link its manufacturing to the vast and rapidly expanding regional and global supply chains. This should be our primary focus to boost exports in the face of the emerging global headwinds discussed earlier.
 

In order to integrate into the global supply chains, policy-makers need to prioritise improving the overall business environment that will reduce transactions costs behind the border, at the border and across the border.
 
Behind the border transaction costs are largely dependent on logistics reforms that include transport infrastructure such as road, rail, ports, and airports; reliable communications and technology infrastructure; and quality logistics services such as transport operators. Quality logistics behind the border allows for efficient and reliable movement of goods and services throughout the country, which translates into lower transaction costs (as well as greater SME market access by removing costly barriers).
 
Trade facilitation seeks to minimise trade impediments and reduce costs at the border and across borders, facilitating greater integration with global supply chains. Apart from customs modernisation, the ambit of trade facilitation includes port logistics, customs procedures, standards harmonisation, business mobility, trade information and e-business infrastructure, administrative transparency and professionalism, and effective government institutions; all of which have a substantial impact on transactions costs and the ability of countries to integrate into global trade.
 
The critical elements of policy required to integrate India into global supply chain are a) relatively low tariffs (to allow easy importation of intermediates) and a simplified tariff structure; b) regulatory environment that is attractive to FDI in manufacturing; c) a taxation system that ensures that no domestic taxes are exported (that is, zero rating of exports); d) introduction of a first rate goods and services tax (GST); e) an environment of low transaction costs of operating across borders; and f) strong logistical linkages, especially with regional economies. India currently lacks the comprehensive reform initiatives in place to achieve these objectives. The passage of the GST is indeed an achievement. However, India, to really transform itself into a common market, should aim for implementing the model GST: a single rate covering both goods and services, single documentation, with a widest possible base that enables the rate to be as low as possible.
 
India does not have the luxury of time. While supply chain efficiency is critical to manufacturing competitiveness, in the present scenario of mass production represented mostly by large-scale assembly line production systems that have remained more or less unchanged since the early 20th century, rapid changes fuelled both by technology and shifting consumer preferences and behaviour (driven by the emergence of the global middle-class) is going to bring some very significant changes in how manufacturing is organised and managed. Some of these trends are already visible in the growth of greater customisation of both final as well as intermediate goods and the use of e-commerce platforms. Such shifts in how global production systems are organised are already seeing India’s competitors putting in huge investments in logistics and trade facilitation. India risks being left behind, and thus the time for logistics, trade and business facilitation is now.
 The writer was economic advisor, commerce ministry (1989-93). These views are his own