Under President Donald Trump, the US has abdicated. Europe is preoccupied and, perhaps, hesitant to fill the gap. China may be keen.
However, while President Xi Jinping explores how, and to what extent, China might assume this new role, India is facing a historic opportunity to, at the very least, complement China’s leadership. But 27 years after economic reforms began to open up India to trade, foreign capital and competition, rising to the moment will once more require a paradigm shift in economic policy.
Make and Trade
India’s government needs to complement its emphasis on manufacturing with a commitment to growth in exports. ‘Make in India’ was a step in the right direction. Now, it should be wedded to a parallel ‘Trade with India’ programme.
With a young, entrepreneurial population of 1.25 billion, India boasts some of the best IT companies in the world, one of the globe’s largest and most important consumer markets, and an estimated 7.3% GDP growth rate for 2018. At the same time, it has been an outspoken advocate of economic multilateralism, while also walking the talk.
Apart from pursuing free trade agreements (FTAs) with both the US and Europe, it has long-standing FTAs with South Asian Association for Regional Cooperation (Saarc) countries and members of the Association of South-East Asian Nations (Asean). India has been increasingly active in geo-economic fora, and has co-created new multilateral banks, such as the Brazil-Russia-India-China-South Africa (Brics) New Development Bank.
But for all its farsighted efforts to reform its economy, one conspicuous shortcoming continues to clip India’s wings. While Prime Minister Narendra Modi’s flagship ‘Make in India’ initiative has helped strengthen manufacturing, the country has neglected to give export performance the attention and supervision it deserves.
India’s hands-off approach to managing exports has left figures to decline significantly over the last decade, resulting in a persistent current account deficit (CAD) and low aggregate demand. This weakens the rupee and limits economic growth. In absence of desperately-needed export revenues to further finance imports and growth, an economy of limitless potential will ultimately lack both the economic power and the policy record to lead the global economy.
‘Make in India’ and a strong manufacturing sector can, in fact, provide the basis for an export-based economy. But the aim of mass-producing competitive products will neither be sustainable nor lucrative without an inflow of export revenues into the country.
Without export proceeds, consumer spending stays flat and India’s entrepreneurs can’t unlock the riches and reinvestment opportunities made possible through a trade surplus.
A ‘Trade with India’ programme focused on building export capacity, reducing tariff and non-tariff barriers to trade, and functioning in conjunction with ‘Make in India’ would allow India’s economy to realise its untold promise. And for inspiration to execute such a programme, India need only look to its neighbours.
India should take a more hands-on approach to developing export capacity. Created following the economic disaster of World War 2, Japan’s ministry of international trade and industry (MITI) worked hand in hand with particular industries identified as critical to growth.
It subsidised these industries, passed legislation conducive to their development, connected them with foreign trade partners, and assisted them in implementing export strategies that were closely aligned with the ministry’s goals for strengthening domestic manufacturing interests. It also reduced tariff rates.
MITI helped fuel Japan’s miraculous ascension to a global economic superpower, and has since provided other Asian nations, from South Korea to China, with a roadmap for export-led growth. Following their lead, a ‘Trade with India’ government initiative could identify and oversee India’s key industries, helping both large companies and small and medium enterprises (SMEs) to globalise their operations and export their products.
Through a system of administrative guidance, GoI could provide critical industries the financial aid needed to build a company’s export capacity, as well as favourable policy to underpin it. It could advise companies on export strategies aligned with the ‘Make in India’ programme’s objectives, organise trade missions, and connect entrepreneurs with foreign trade partners.
‘Trade with India’ could also reduce tariff and non-tariff barriers, obligating domestic firms to cut costs and increase productivity in the face of increased foreign competition.
Increased exports would generate an inflow of revenue into India, stimulating customer spending. Export growth would resolve India’s low aggregate demand dilemma, raising economic output and GDP, while lowering unemployment. All of these things would equal significant, sustainable growth. Such an initiative would require a very well-coordinated effort from the ministry of commerce and industry, not to mention a few growing pains.
But India’s continued growth depends on GoI’s ability to help entrepreneurs match increased manufacturing with increased exports — just as global economic stability depends on multilateral free trade, and multilateral trade depends on strong global economic leaders who can promote and fuel such cooperation. India, unlike few others, has a golden opportunity to play that role.