Reforms for higher growth: India must capitalise on international trade

India needs faster tariff cuts, deeper trade integration and stronger investment treaties to boost exports, attract FDI and sustain the high growth needed to become a developed economy

A series of reports and interviews published by this newspaper over the past two weeks or so to mark 35 years of economic liberalisation indicates that, while much has been done over the years, India needs to do a lot more.  This is particularly important in the context of the government’s goal of making India a developed country by the centenary of its Independence. Only continued reforms will enable India to sustainably grow at higher rates. Higher growth is necessary also to create jobs at the scale India needs for its growing workforce. Notably, at an event last week, NITI Aayog Vice-Chairman Ashok Lahiri noted that to become a developed country, India’s per capita income in nominal dollar terms needed to grow at 9.25 per cent on average for 21 years. This will not be easy, but since some other countries have done it, India too can. 

The government certainly is aware of challenges and opportunities. Efforts are being made to improve conditions to enable higher growth. However, one area where India has lagged over the past several years is capitalising on international trade. Countries such as South Korea and China that achieved higher growth in recent decades, and transformed their economies, did exceptionally well in exports. Economists have long argued that India needs to aggressively focus on this area. Encouragingly, Union Finance Minister Nirmala Sitharaman, in an address last week, noted that possibly by the 2027-28 Budget, she would be able to say that barring a few items, Customs duty will come down to single digits. The government has been working in this area, and duties and slabs have been rationalised. A further push in this direction must be welcomed. India needs a simple and low-tariff regime. Unfortunately, India raised tariffs about a decade ago, which affected competitiveness. It is well accepted that a tax on imports is an implicit tax on exports. Tariffs increase costs, affecting the ability of businesses to compete in global markets. 

India has done well to sign trade agreements more recently, including those with the United Kingdom and the European Union. It will now have to focus on utilising these agreements. But it still needs to bring down tariffs in general. In the modern trade architecture, the bulk of the goods movement happens in intermediates, and higher tariffs create friction, which restricts participation in global value chains. Further, since India is signing deeper agreements with developed countries, it must also consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership to maximise benefits. 

Along with quickly completing tariff rationalisation, India must also focus on investment treaties. In this context, the government has indicated that the template for bilateral investment treaties is being made more accommodating. Foreign direct investment can be a big driver of exports. Thus, India needs to work on multiple fronts to capitalise on trade, which can be a big and sustainable driver of growth, as has been proved by several countries. The data compiled by the World Bank shows that India’s exports of goods and services peaked at 25.4 per cent of gross domestic product in 2013. It went above 35 per cent for China in the 2000s and has been at a much higher level in the case of South Korea. A sound external position is also essential from the macroeconomic management perspective. The difficulties on the balance of payments, which prompted the Reserve Bank of India to mobilise foreign exchange through various instruments, including deposits from non-resident Indians, underscore the external-sector weakness. India needs to quickly overcome these challenges.