Quest for value chains and exports

There are critical shortcomings in India's export policy that need to be tackled to expand its share of goods trade. Here are three suggestions that merit consideration

In her excellent article last week, Amita Batra posed the thought-provoking question: “Who will India trade with?” (Business Standard, April 6, 2023). The thrust of her argument was that global merchandise trade was getting increasingly consolidated into three mega-regional trading blocs: North America, European Union (EU) and ASEAN-East Asia.

What is more, in the first two, in response to growing US-China trade conflicts, the Covid pandemic, the war in Ukraine and climate change considerations, “selective and exclusionary trade policies”, in apparent contradiction to the most-favoured-nation (MFN) principle of WTO, were gaining ground at the expense of developing and the least developed nations. In ASEAN-East Asia, two mega-regional trade agreements, the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), though WTO-compatible, were steadily deepening economic integration in the region. “Not having acceded to RCEP, not having applied yet for the membership of the CPTPP, the trade agreement with EU still only under negotiation, and an FTA with the USA not even under consideration, may just leave India out in the cold.”

By any standards, this is a profound, relevant and deeply disturbing issue, which, by the way, is neither posed nor addressed in the Foreign Trade Policy 2023 of the government published a fortnight ago. Before I offer some preliminary thoughts on the possible ways forward for India in this emerging predicament, let me sketch a background capsule summary of India’s trade policies in the last 60 years.

As with any real world policy dimension, the burden of history, especially wrong turns taken, lies heavy. Following the foreign exchange crisis of the mid-1950s and the pervasive (and entirely mistaken) “export pessimism” of the 1960s, India’s policymakers constructed a hideously complex structure of import and industrial controls/licences, buttressed by ridiculously high customs tariffs. Despite brilliant critiques of this policy regime by economists like Jagdish Bhagwati, Padma Desai, T N Srinivasan, Vijay Joshi, Ian Little, Anne Krueger and others in the early 1970s, this autarkic, inefficiency-breeding policy edifice broadly continued till 1990. As studies have shown, its costs in terms of foregone trade and growth in national output and employment were very heavy. By 1990, with 16 per cent of the world’s population, India could only manage 0.5 per cent of global goods exports, when South Korea, with one-twentieth of India’s population, accounted for 1.9 per cent of world goods exports.

The balance of payments crisis of 1991 triggered major reforms of trade, industrial, foreign investment and exchange rate policies. To the eternal credit of Narasimha Rao and Manmohan Singh, the exchange rate was made largely market determined, industrial licensing was virtually abolished as were import controls on capital and intermediate goods (those on consumer goods only went by 2001) and peak customs tariffs were reduced from near 300 per cent (!!!) to 50 per cent by 1995 (and after that, rather slowly to near East Asian levels by 2015). Exports did respond, with India’s global share rising to 0.7 per cent by 2000, 1.0 per cent by 2005 and 1.7 per cent by 2015, where it has stagnated since, partly because of the significant (and unfortunate) increases in India’s tariffs since 2016. But this increase in export share pales in comparison with the explosive surge in the share of China from below 1 per cent in 1980 to 3.9 per cent in 2000 and 15 per cent in 2020.

The critical lacuna in India’s trade policies post-2000 has been the failure to participate significantly in global and regional value chains (GVCs/RVCs), which became the dominant feature/instrument of global goods trade from the late 1990s to 2020. There are many reasons for this crucial weakness, including: The slow pace of tariff reductions after 1995, weak or ineffective participation in regional free trade agreements (FTAs), poor domestic logistics and trade facilitation and serious constraints inhibiting development of a competitive manufacturing sector because of not just trade policies but also those relating to small scale industry reservations, labour market rigidities, foreign investment, inadequate infrastructure development, and weak skill formation even at lower levels. There was also very limited understanding in policy (and even academic) circles of the strong, mutually supportive interactions between GVCs/RVCs and FTAs. Needless to say, the interplay between competitive democratic politics and vested industrial/commercial interests also played its part in stalling tariff reductions and deeper participation in FTAs.

So, given the emerging predicament outlined in the opening paragraph above, what should India do now to expand her gainful trading opportunities in the years ahead? Here are three not-mutually-exclusive suggestions which merit serious consideration.

First, by all means, let us strive to arrive at a successful outcome in the ongoing EU-India FTA negotiations. However, given the long history and the growing linkages of trade with climate-carbon issues in EU policies, the prospects for a wide and deep agreement do not seem high.

Second, we must seriously review our late-stage reluctance of November 2019 and revive an effort to join RCEP on approximately the terms available three and a half years ago. To the extent the “China factor” weighs heavy on our minds, we should note that China’s huge economic and military strength is also of grave concern to most of our other Asian neighbours, including Japan, Korea and most ASEAN nations, and some have ongoing territorial/maritime disputes with China. But this has not prevented them from having deep, mutually beneficial trade and investment linkages with their giant ($19 trillion GDP) neighbour. Also, our having extant FTAs with ASEAN, Japan and Korea is no substitute for being a full-fledged member of RCEP, with common and cumulative rules of origin, regulatory standards and investment rules.

Third, we should apply for membership to CPTPP, even though this entails a “higher order” of economic integration than RCEP. This mega-regional could well become a more powerful propellant of trade dynamism than RCEP in the long-run. It is noteworthy that Britain recently became a member within two years of applying.

Above all, let us recall the lesson of post-1950 economic development history: No sizeable nation (without significant mineral resources) has enjoyed sustained high growth of GDP and employment without achieving sustained rapid growth of goods exports.

The writer is honorary professor at ICRIER, former chief economic advisor to the Government of India and author of An Economist at Home and Abroad (HarperCollins, 2021)