Listen to NITI Aayog: Boost trade competitiveness to strengthen economy

The Union government should take note of the advice of NITI Aayog Chief Executive Officer B V R Subrahmanyam. On Monday, Mr Subrahmanyam made several interesting and important observations, which pointed to the shortcomings in India’s policy thinking in the context of international trade and what needed to be done. He argued, among other things, that India needed a sharper focus on Asia, including China, along with stronger trading relations with neighbours. To be fair, India’s trading arrangements with neighbours, to a large extent, depend on geopolitical conditions, which are often unfavourable. Nevertheless, India can integrate with the rest of Asia, which is likely to be the most significant driver of global growth in the coming years. But India has remained reluctant because of the presence of China and the outcomes of its trade agreement with the Association of Southeast Asian Nations.

 

However, as Mr Subrahmanyam rightly alluded to, it is not possible to avoid China, the world’s second-largest economy. Some countries have a trade surplus with China. The basic reason behind India’s reluctance to open up the economy is a lack of competitiveness, which is partly a result of its trade policy. Higher tariffs to protect domestic businesses end up taxing inputs, which directly affects the competitiveness of Indian exporters. India needs to address this issue urgently. The latest Trade Watch quarterly report of the NITI Aayog, which has focused on leather and footwear exports, for example, noted that India imposed about 10 per cent tariff on key footwear inputs, while its competitors, such as Vietnam, levy near-zero rates. India’s approach needs to change. A senior government official, for example, was recently reported suggesting that India should focus on free-trade agreements (FTAs) with economies that are not competitive. This is not the right way to approach trade. In any case, even if India trades with a country that is not very competitive, that country can always buy goods from sources that are more competitive than India.

 

India has done well to sign an FTA with the United Kingdom and is negotiating one with the European Union (EU). It is in India’s interests to conclude the FTA with the EU at the earliest. India is also negotiating with the United States (US) to arrive at a mutually beneficial trade agreement. However, given the unpredictable nature of the US administration, India must quickly get into deeper trade agreements with other partners. The country, for instance, is not part of mega-regional trade agreements. This, among other things, makes it difficult to get integrated into global value chains. India has expressed reservations about joining the Regional Comprehensive Economic Partnership, primarily due to China’s presence. The position should be reviewed. India should also consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

 

It is important for India to focus on expanding exports. External demand can be an important source of sustaining high growth, as demonstrated by several Asian countries in recent decades. Research featured in the latest Monetary Policy Report of the Reserve Bank of India shows that export growth, both at company and aggregate levels, has a statistically significant impact on fixed investment growth. Revival in private investment is said to be the key to sustaining higher growth over the medium term. Thus, improving trade prospects can enhance and sustain growth through different channels.