In step with a reordered world: A Viksit Bharat needs domestic market focus

A greater inward orientation is inevitable in years ahead for two reasons. One is a slowing down of growth in world trade. The second channel through which GEF will make itself felt is flows in FDI

Economists never tire of pointing out that no economy has been able to sustain growth at over 7 per cent without strong export growth. That was in the heady days of globalisation and booming world trade. 

Those days are gone now. The Economic Survey for 2024-25 observes candidly: “Across the world, the focus of policymaking globally has shifted inwards. The promise of shared benefits from a globalised world with open trade, free flow of capital and technology, and sanctity for rules of the game may be behind us. It is as unwelcome and unfortunate as it is real.” 

The story of geo-economic fragmentation (GEF) and the implied reversal of globalisation  has been visible for some years now. It predates even Donald Trump’s first tenure as President of the United States (US). Mr Trump’s second tenure promises to strengthen GEF in ways that one cannot even fully comprehend at this point. 

But if exports cannot be an engine of growth, how does India grow its gross domestic product (GDP) at 8 per cent annually, which is needed to attain the objective of a Viksit Bharat or “developed country” status by 2047? The Survey’s answer:India will have to rely more on the domestic market and less on exports to drive growth in the coming years. Whether that will translate into 8 per cent annual growth is the big question. 

A greater inward orientation is inevitable in the years ahead for two reasons. One is a slowing down of growth in world trade. Even as tariffs were reduced everywhere, nations increased non-tariff, trade-restrictive measures. Technical barriers to trade (TBT) today affect 31.6 per cent of product lines, covering 67.1 per cent of global trade (as of December 2024). Export-related measures affect 31.2 per cent of shipments worldwide. Climate-related non-tariff measures come into play in the case of 26.4 per cent of those.  

Mr Trump’s promised tariffs and retaliatory tariffs by other economies can be expected to take restrictions on free trade to a new level altogether. The Survey cites research that places the cost to global output from trade fragmentation anywhere from 0.2 to 7 per cent of GDP, depending on how far GEF goes. 

The second channel through which GEF will make itself felt is flows in foreign direct investment (FDI). Firms want to locate FDI only in countries that are geopolitically aligned with the country of origin. The losers are emerging markets and developing countries, both of which are seeing a lower share of FDI flows than in the past. 

The tolerable level of the current-account deficit — the level of the deficit in India that can be supported by capital flows — may well be lower than in the past. That would be another good reason to cut back on imports and promote import-substitution.

There is a third important reason why India will have to rely more on domestic production. It is the need to reduce reliance on China. The Survey notes: “The single-source concentration risk in several product areas exposes India to potential supply chain disruptions, price fluctuations and currency risks. India’s task is cut out.” 

The previous Survey had mooted the idea of opening up more to FDI from China as a means of reducing dependence on imports from that country. The latest Survey has dropped that line. More FDI from China may lower the trade deficit with China but it doesn’t take away dependence on China, which is the real issue. 

The Survey talks of strengthening domestic supply chains and finding alternative sources of supply even if those are not cost-competitive. It follows that the priority is not always competing in the export market by accessing inputs at the lowest cost. Fostering self-reliance and national security are important considerations in choosing the sources of inputs in today’s environment — and India is by no means alone in arriving at such a conclusion. 

One of the mantras of the post-liberalisation era has been that protectionism or high tariff is inimical to growth. The latest Survey argues that protectionism is not such a bad thing. Industrial policy, which is promoting growth in identified sectors and by identified industrial groups, is back in fashion. 

We have long been told that the East Asian miracle involved the sensible use of industrial policy while ensuring firms’ competitiveness. Now, we are told that the rise of Continental Europe and the US as industrial powers can also be ascribed to industrial policy. And industrial policy has always meant the use of high external tariffs. In saying these, the Survey merely echoes what Mr Trump and his team of economic advisors are saying. Many of the high priests of free trade seem to have fallen silent in the face of an ongoing counter-revolution in economic policy-making. 

In line with trends elsewhere, Indian economic policy has been moving towards a greater inward orientation in recent years. Going by the World Trade Organization data, the average tariff rate in India rose from 13.4 per cent in 2016 to 17 per cent in 2023. In March 2020, the government introduced the production-linked incentive scheme, which was intended to boost domestic manufacturing through a combination of subsidies and high tariffs on imports. India also has domestic content requirements, under which some projects must use a certain proportion of domestically produced components and favour domestic producers in public procurement. 

Critics had panned these moves as anti-reform. In the light of what Mr Trump now promises, these steps look remarkably prescient. Apart from free trade, “structural reforms” in the liberalisation era meant things such as privatisation, hire and fire of labour, and easier land acquisition. There is little mention of these in the latest Survey. The “structural reform” that the Survey focuses on is greater deregulation in areas other than the ones listed above. 

Reducing the burden of regulations will certainly make it easier for firms to invest and improve the efficiency of investment. But the more important factor in spurring investment is low uncertainty and less volatility in the broader environment. The burden of regulation did not prevent Indian businesses from investing heavily during the global boom of 2004-08, when there was a general euphoria about the longer-term business outlook. 

Alas, that is not the case now. The reordering of the international economic and political system that Mr Trump has in mind will cause businesses everywhere to wait and watch until things settle down. Reducing regulations will not suffice to ignite exuberance among investors, Indian or foreign. In navigating these uncertain times, the government may want to step up capital expenditure beyond the modest 10.1 per cent increase it has budgeted for FY26 over the previous year’s revised estimate. 

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