Sanjaya Baru | A widening gulf: India’s trade policy needs a fix

Columnist  | Sanjaya Baru

Opinion, Columnists

India's foreign trade performance has declined under the Modi government, reflecting policy shifts and missed opportunities

The decline in share of foreign trade in national income is mirrored in the decline in India’s share of world exports. In short, the record of the Narendra Modi government in the realm of foreign trade -- both policy and performance -- has been disappointing, especially compared to what was achieved in the preceding decade.n(File Image: AFP)

India has never shied away from picking a fight with its trade partners during negotiations at the meetings of the World Trade Organisation. Yet, it was certainly out of character for Indian negotiators to have picked a quarrel with their counterparts from Thailand. There was a time when India and Thailand were allies at the WTO and in 2002 India supported the candidature of Thailand’s trade negotiator, later its trade minister, Supachai Panitchpakdi, for the post of WTO director-general.

But the spat with Thailand at last week’s WTO ministerial conference in Abu Dhabi over a Thai accusation that India was subsidising its rice exports was not entirely out of character given the Narendra Modi government’s defensive approach to foreign trade.

Despite all the brouhaha on India being the world’s fastest growing economy, in itself a questionable claim, the fact is that the performance of the economy in the arena of international trade has been below par. Foreign trade was an engine of growth during Prime Minister Manmohan Singh’s tenure, contributing to the eight per cent average rate of national income growth during 2003-2012. Since 2014, India has been faltering on foreign trade, both policy and performance, raising questions about the global competitiveness of Indian industry.

After going down from two per cent in 1950 to 0.5 per cent in 1990, India’s share of world merchandise exports rose handsomely in the 1991-2011 period, crossing two per cent by 2010, thanks to the trade and industrial policy reforms initiated in 1991. On top of this rise in merchandise goods trade, India also notched up impressive performance in service exports, with India’s share of world services exports touching four per cent. During the decade 2004-2014, the share of foreign trade in national income rose to a high of 56 per cent in 2012. Since 2014, that share has remained well below 50 per cent.

The decline in share of foreign trade in national income is mirrored in the decline in India’s share of world exports. In short, the record of the Narendra Modi government in the realm of foreign trade -- both policy and performance -- has been disappointing, especially compared to what was achieved in the preceding decade.

The Modi government’s policy on foreign trade has been shaped partly by the inherently protectionist ideology of the Bharatiya Janata Party and partly by Indian industry’s growing fear of competition from China. While tariffs were rapidly reduced during the decade 1991-2001, after 2017 the government chose to raise them for the first time in two decades. Despite this, China has managed to increase its exports to India, drawing attention to critical dependencies that Indian industry has not been able to liberate itself from.

To be fair to India’s trade negotiators and ministers, the reality is that they have always had to bat on a sticky wicket. India has remained a defensive player, always trying to protect its own turf without aggressively seeking markets.

Consequently, Indian negotiators have had to always respond to other countries’ proposals rather than table one of their own. Even so, India could have played more smartly at last week’s Abu Dhabi ministerial.

One of the most puzzling questions regarding Prime Minister Modi’s allocation of portfolios is why he never chose to name Hardeep Singh Puri for the commerce portfolio. If there is one person in the Modi government who is au fait with trade policy and the WTO it is Mr Puri. A former trade diplomat, Mr Puri would have done much better than the three lacklustre performers at Udyog Bhavan -- Nirmala Sitharaman, Suresh Prabhu and Piyush Goyal.

While Mr Prabhu was sincere in his efforts, he lacked the chutzpah that was required to carry weight with Western trade policy negotiators. Both Ms Sitharaman and Mr Goyal were out of their depth and hid their technical incompetence behind their arrogance and bravado. None of them was able to make any impact either on multilateral trade policy negotiations or even on bilateral and plurilateral negotiations.

The incompetence of individual ministers, and their obedient officials, is only a minor part of the abysmal story of trade policy and performance during the Narendra Modi years. The larger part of the problem has been the inability to secure a deal with any of the major markets around the world. Despite all the bonhomie with US President Donald Trump, Prime Minister Modi failed to get Mr Trump to reverse his decision to end India’s access to the US market through the Generalised System of Preferences (GSP).

The US remains a difficult entity, constantly complaining about India’s trade policy and abut the trade deficit it runs with India. At the WTO ministerial conference last week, commerce minister Piyush Goyal found himself standing alone on an important matter like trade facilitation, with only his South African counterpart for company.

India came in for criticism from the United States, the European Union, China and the Asean bloc. With the world’s second largest market, the European Union and post-Brexit Britain, India continues to negotiate a free trade agreement but has not been able to amicably conclude those negotiations. If such is the case with the Western developed economies, the experience with the exporting powers of Asia has been no better.

India walked out of the Regional Comprehensive Economic Partnership (RCEP), naming the trade threat from China as the main reason. Yet, trade with China continues robustly.

The RCEP decision has, on the other hand, hurt trade prospects with the other RCEP members, including Japan and the Asean economies.

The global economy has three big markets -- the United States, the European Union and East Asia. India has not been able to make a significant headway in any of these three markets. Prime Minister Modi can only claim some progress in the Gulf, especially with his friendly neighbour in Dubai. After this summer’s general election, the next government needs to pay closer attention to trade policy, which also means industrial and foreign investment policy. All three go hand in hand. Neither “Make in India” nor trade policy have delivered impressive results in the past decade. Emerging as the world’s third largest economy and sustaining that position requires far-reaching changes to industrial and trade policy. The lazy defensiveness of the past decade cannot serve the goal set by Prime Minister Narendra Modi.