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World Apart
India’s approach to trade remains too anachronistic
Our export goals would be easier to achieve if we adapt our policy framework to global realities
Is there a more reluctant free trader among the G20 nations than India? Consider the arbitrary ban on non-basmati rice on 20 July, which has added to the inflationary spiral in food prices for developing countries. Or look at the small print of the ‘free trade’ pact with Australia last year where India promised to reduce tariffs on less than three-quarters of the products traded, while Australia has committed 100%. The inching reduction on 150% duties over the coming decade on wine, an industry one assumes had relatively few domestic lobbyists crying for protection, reveals how timid our trade deals are. Then there is the free trade agreement (FTA) under discussion with the European Union, which has taken more than a decade and a half of off-again, on-again negotiations. And the range of disagreements still to be resolved reportedly runs the gamut from tariffs and rules of origin to dispute settlement. In other words, most of the spectrum that drives international trade.
But even this understates how anachronistic India’s approach to trade remains. Our Asean competitors have for some time now relaxed rules of origin because products such as smartphones and other electronics cross borders multiple times. But India continues to obsess over them. Repeatedly voicing our aspiration to be a substitute for China in global manufacturing, seemingly without realizing how deeply embedded competitors such as Vietnam are in these complex supply chains, is another peculiarity of Indian Trade Policy. “We have not appreciated the importance of FTAs in value chain integration,” Amita Batra, author of India’s Trade Policy in the 21st Century, told me. “Other countries have used FTAs to join the global value chain.”
The unseen dragon at the negotiating table appears to be our worry that Chinese products would find a back-door into India through any trade agreements we ink. Changes to our customs laws in 2020 have “made utilization of FTAs even more burdensome as the importer is now liable for satisfying scrutiny by the government of India on the question of origin of the imported product, over and above obtaining the certificate of origin,” Batra wrote recently in Business Standard. By contrast, Asean, seeking to increase regional trade flows and confident that trade is not a zero-sum game, made regulations on value-added content and rules of origin much simpler almost two decades ago. I have been casually following the Thai economy for 30 years and continue to be impressed by how much it has benefitted from Japanese investment in its auto and auto components industry, despite having poorer educational standards and demographics than its regional peers.
Put it down to sensible trade policies. Thailand has had a dysfunctional military junta managing its economy for almost a decade in an uninspired fashion—other than its commitment to freer trade. This week, its parliament will seek to appoint a prime minister with the support of the military after rigging the process to ensure that the winner of mid-May elections is kept out of the government. Vietnam isn’t a poster boy of good governance either, given that it is ruled by a Communist autocracy. But, the winner in the China-plus-one race, which is actually a decade old and was originally driven by double-digit wage inflation in southern China, is Vietnam. Its merchandise exports rose from $115 billion in 2012 to $371 billion in 2022. Indeed, as a seminal World Bank study of the four ‘Asian Tigers’—South Korea, Taiwan, Hong Kong and Singapore—and Indonesia, Thailand and Malaysia underlined almost three decades ago, the only common thread to the rapid development of these very different countries was a commitment to free trade and universal primary education.
Under the previous Congress-led coalition, India’s Olympian feat on the global trade scene, by contrast, had been to bring World Trade Organization meetings to a standstill. The Modi government abruptly pulled out of the regional comprehensive economic partnership in 2019, another epic own goal. Now, hardly a fortnight goes by without news of another sector being considered for subsidies to boost manufacturing domestically. While it is true that industrial policy is all the rage in the developed world, our productivity-linked incentive (PLI) scheme is already setting new benchmarks in numbing complexity and pointless form filling. This week, Mint revealed that a top Korean trade body has complained that Korean companies drawn in by PLIs have not received the incentives promised. At the core of this is the plight of Samsung Electronics, to which ₹900 crore in incentives have been withheld by the Centre, “citing invoicing discrepancies”, as Mint reported.
A word commonly used to describe Indian trade and economic policy is ‘insularity’. This is perhaps unfair. Officials scrutinizing the Korean giant’s invoices may know but not care that 50% of Samsung’s smartphone production is from half a dozen factories in Vietnam. That country has become a global production base for electronics because of Samsung. Meanwhile, as our labour-intensive exports decline, partly due to the global slump but also a loss in competitiveness and successive increases in tariffs on inputs, along comes news that New Delhi is pushing to introduce uniquely “Indian shoe sizes”, a break from the “colonial mindset” of US and UK sizes. While we are on such minutiae of industrial policy, may I make a plea to accommodate people like me who suffer from having one foot larger than the other?
Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.
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First Published:2 Aug 2023, 09:38 PM IST
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