India will become more like Latin America than a miracle Asian economy
Trade conflicts among large players involving China, the United States, the European Union and many others, including India, dominated the global economic narrative in 2019.
The multilateral trading system of the WTO (World Trade Organisation) has already been under serious stress. Due to a number of preferential/regional trading agreements as well as various deadlocks, its relevance is already in decline.
In these circumstances, every important economic player is devising different strategies to deal with the situation. With only about 2 per cent share in global exports, new dynamics in global trade architecture could be an opportunity for India to improve its performance. However, this can only happen with correct fundamentals and an appropriate liberal trade policy framework.
As the recent World Development Report shows, trade growth since 2008 has been sluggish and expansion of global value chains has slowed. So, it is not very easy now for India to be part of those global value chains, which might be relocating from China.
Still, a few countries such as Bangladesh, Vietnam, Cambodia, Thailand and the Philippines, among others, have shown that it is still possible to emerge as new centers of manufacturing -- at least in few specific products. These include clothing, footwear, food processing, electronic integrated circuits and the like.
More than half of global trade is through value chains. And China is at the center of this network. Chinese labour cost is rising. Its environmental regulations are becoming stricter. Now trade tensions with the US have added more trouble. Still, apart from very few sectors (mobile phones), India is not really emerging as an attractive alternative even when some of these companies are in the process of relocating units from China.
The reasons are manifold. Despite all the talk of Make in India in the past five years, Indian manufacturing sector has still not taken off. In fact, some of the flagship sectors are in difficulty. As columnist Swaminathan Aiyar argued earlier during economic liberalisation in the 1990s, three sectors in the economy viz. information technology, pharmaceuticals and auto became international and produced world-class Indian multinationals. This trend has changed in 2010s and many of these companies are in trouble. Some new emerging companies (unicorns) like Ola Cabs, Flipkart are just cloning western techniques and lack new technological innovation, according to Aiyer.
There is a clear lack of focus. Resources and reforms in the public higher education sector are crucial for any new high technology sector to take off. Instead of state nurturing, the higher education system is facing a crisis.
New Delhi’s decision to opt out of the Regional Comprehensive Economic Partnership (RCEP) shows that Indian economy is still not ready to participate in Asia’s economic rise. Possible reasons cited by analysts are more than $100 billion trade deficit with RCEP countries as well as slowdown in growth and exports.
Apart from political opposition from the Congress, the main reason perhaps is opposition coming from Swadeshi Jagran Manch and Bharatiya Kisan Sangh, the two affiliates of Rashtriya Swayamsevak Sangh (RSS). The Narendra Modi government has been very cautious about trade deals and investment agreements anyway. Hardly any new trade agreement has been signed by India in the past five years. A number of bilateral investment treaties have also been terminated.
With such a cautious approach towards trade negotiations and investment treaties, it is hardly surprising that India has not become an important player in global value chains. Even in global apparel trade, India’s share has stagnated around 4 per cent. This, despite the advantage of large domestic market for scaling, domestic supply of cotton and other raw materials and a large labour pool. Bangladesh and Vietnam are already bigger players than India on this front.
With the WTO deadlocked, can India become a global economic player without signing trade and investment agreements with the RCEP bloc, the EU and the US? That’s a serious question.
Due to distortions in land and labour markets as well as weaknesses in infrastructure and the banking sector, Indian companies are already struggling in traditional areas. With protectionist mindset, increasing income inequality and lack of focus on public higher education, India is unlikely to emerge as an important player in emerging areas of high technology. India now will become more like Latin America than a miracle Asian economy.
A large country like India has the capacity to change global value chain architecture. Despite the rhetoric, however, the last few years have shown that New Delhi is still a reluctant participant in globalisation and global value chains. So, India is somewhat insulated from the consequences as well as opportunities from global trade wars. Whatever happens between major global trade players will have limited impact on India.Gulshan Sachdeva is Jean Monnet Chair and Chairperson Centre for European Studies, School of International Studies, at Jawaharlal Nehru University. Views are personal.