Opinion Why new government should embrace global markets

The pandemic showed the world the consequences of import disruptions. While diversifying GVCs is certainly a medium to long-term aim, it is not without costs in the short run. We are banking on the augmentation of local capacity through schemes such as production-linked incentives (PLIs) that provide performance-based financial incentives for local production. Until November 2023, PLI schemes have resulted in the production/sales of Rs 8.61 lakh crore and generated employment (direct and indirect) of over 6.78 lakh. Before that, the government exited negotiations for the Regional Comprehensive Economic Partnership (RCEP). Its existing trade deficit with China emerged as a key reason for this exit, along with the non-consideration of its key demand on cross-border movement of professionals and the influence of the cooperatives-intensive farm and dairy sector that feared competition from New Zealand and Australia among others.

India’s journey towards free trade and multilateralism has been fraught with challenges. It pursued an aggressive import substitution policy during the 1980s but found import substitution and export promotion to be quite contradictory. So, during and beyond the 1991 crisis, it adopted a liberal trade policy but subsequently remained reluctant to embrace second- or third-generation trade reforms. This has been mainly due to India’s experience of trade deficit with countries with which it signed trade agreements. This strong policy narrative slowed down its liberalisation and participation in GVCs.

India’s economic isolationism strategy has since changed for the better. We have signed several FTAs including four FTAs since 2021 after nine years of no agreements. These include the India-Mauritius Comprehensive Economic Cooperation and Partnership Agreement (CECPA) in 2021, the India-UAE Comprehensive Economic Partnership Agreement (CEPA), and the India-Australia Economic Cooperation and Trade Agreement (CECTA) in 2022. The latest Trade and Economic Partnership Agreement (TEPA) with EFTA countries (Switzerland, Iceland, Norway, Liechtenstein) was signed on March 10 and secured commitments of $100 billion and 1 million direct jobs over the next 15 years.

Despite this, we are ambiguous about regional trade agreements (RTAs), mainly the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). Globally, these are the two mega-regional trade agreements and India finds itself outside both. We have eternally supported multilateralism in the World Trade Organisation (WTO) and elsewhere. At the same time, we stay away from discussions on services and e-commerce in the WTO, again revealing an ambivalence to more engagement. Even if India disagrees, it is better to be part of the negotiations or in other words “in the tent”, than outside it. Non-participation is often interpreted as a sign of weakness for which there is no reason whatsoever at this juncture.

There is no doubt that we now recognise the importance of deepening penetration in global markets, as reflected in flagship programmes like Make in India. Such initiatives could be helped by bilateral trade agreements, but are likely to be adversely affected by India’s reluctance to join RTAs, underlining the enduring reluctance to embrace trade for its strategic advantage. The fear of China looms large, but we need to shrug off this mentality that is of no strategic advantage.

Geopolitically, India has attempted to establish itself as an important global player, aided by its hosting of the G20 presidency. It is aiming to position itself as an alternate manufacturing destination to China and compete with other South Asian economies like Vietnam, Cambodia and Bangladesh. This is a descent — from being compared with China a decade or more ago, we now compete with lesser powers for investment. In April 2024, an RBI bulletin underscored strong investment demand and positive business and consumer sentiments as key drivers of economic growth. We urgently need to recognise that from an economic perspective, we need open global markets more than ever for exports and for creating efficiency and competition in domestic markets. But this is often couched in obscure language. Simply put, even after 25 years of the 1991 reforms, we are humouring protectionist tendencies. Counter to the dominant narrative, openness will also aid labour-intensive manufacturing and speak to one of India’s stubborn problems of productive job creation or lack thereof.

In recent years, the concept of digital public infrastructure (DPI) has gained significant attention. DPI is a potentially transformative process that utilises ubiquitous digital technologies to connect people and devices. India has built public digital platforms that have transformed lives. Many countries have shown interest in them and this could be an important marker of India’s soft power. It has even been called a “low-cost, software-based version of China’s infrastructure-led Belt and Road Initiative.” But India needs to tread this line with caution and not be dogmatic about its structure. What’s more, if we wish to situate ourselves as a “rule-shaper” as opposed to a “rule-taker”, we need to unequivocally demonstrate our embrace of global markets, and to use a colloquialism, “put our money where our mouth is”. For a labour-abundant economy, it is far better to subsidise job creation rather than industry. Now is an opportunity to shed inhibitions and do a repeat of 1991— without waiting for a crisis to do so.

Kathuria is dean, School of Humanities and Social Sciences and professor of Economics at the Shiv Nadar Institution of Eminence. Views are personal