FTA strategy: India may well give up hope to become global manufacturing hub and exporter; here is why

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Published: December 7, 2017 5:32:57 AM

If the strategy is to stay away from FTAs since they enable imports, India might as well give up hopes of becoming a global manufacturing hub and manufacturing exporter in the foreseeable future

FTA , India FTA strategy, manufacturing hub , exporterIf the strategy is to stay away from FTAs since they enable imports, India might as well give up hopes of becoming a global manufacturing hub and manufacturing exporter in the foreseeable future (Reuters)

Indian policy on free trade agreements (FTAs) and, more generally, over the country’s external trade policy remains confused with India out of sync in various trade negotiations. It is unable to generate interest among members at the Regional Comprehensive Economic Partnership (RCEP) on its demand for greater market access in services. It is unable to decide on how to proceed on pending FTAs with the European Union, Australia and Canada. And at the World Trade Organisation (WTO), it continues to block other proposals (for example, multilateral rules on e-commerce), while not finding takers for its own (for example, trade facilitation agreement on services). Why is India so confused on trade and why are its positions at global and regional trade talks so much at variance with most of the rest of the world, developed and developing? The nature of India’s economic integration with the world and its mindset on imports are important reasons in this regard. As the world globalised from the 1980s onwards, production begun getting offshored, with developed economies outsourcing several key functions to developing countries. Many among the latter—such as China, Mexico, Turkey, Thailand, Ethiopia, Vietnam, Bangladesh and Cambodia—benefited by picking up labour-intensive outsourced manufacturing. These economies specialised in exporting manufactures back to countries like the US that outsourced production in the first place. India, too, benefited, but not as extensively. Limitations on expanding scale, difficulty in accessing cheap credit and lack of adequate labour with the right skills prevented India from exploiting manufacturing offshoring as much as many others.

However, the country benefited significantly from globalisation and outsourcing in another respect. It picked up the largest chunks of global outsourcing in information technology (IT), communication and financial services from developed nations. It also became one of the largest suppliers of specialists to advanced country markets as businesses in the latter invested billions in software, digital technology applications and new financial products. With globalisation easing labour mobility, Indians began moving overseas to various professions in large numbers, across a range of skills, elevating India to its current status of the largest remittance recipient in the world. This pattern of India’s economic integration has had a great influence on its vision of trade and FTAs. Many other developing countries from Asia and America, which are bigger manufacturing exporters than India, aggressively push for greater liberalisation in market access for manufacturing exports. India, while not reluctant on such access, contrasts the rest in its forceful demand for liberal market access in services, particularly movement of skilled professionals. The relative contrasts often become sources of contestation in trade negotiations between each other.

India’s relatively lesser prowess as a manufacturing exporter has also been due to the peculiar mindset that exports are good, but imports are bad. The mindset has been responsible for maintaining high tariffs on several products, including several items that are necessary for manufacturing exports. Notions of imports being ‘bad’ for the country—both as economic flows incurring foreign exchange and being injurious for prospects of domestic industry—have inhibited India’s growth as a manufacturing exporter. The first justifies perpetuation of tariffs for a fiscally strained government and the second enables domestic industry to keep lobbying for protection. Both impressions put India in a tight corner in negotiating with Asian countries, such as in RCEP, where others have lesser or zero tariffs across the entire spectrum of manufactured products given their proclivities as manufacturing exporters. This characteristic makes them far more receptive to imports compared with India. However, they are hardly as receptive when it comes to service imports, particularly labour movements from other countries. The latter step into the politically sensitive arena of immigration, where most countries, including India, are sceptical to liberal commitments given the sociocultural and security implications. It is ironical that while making India a global manufacturing powerhouse is an acceptable slogan for all political parties and industry houses, the practical necessity of a more liberal import policy for accomplishing the goal is unacceptable. Imports keep raising red flags with unfailing regularity among all the stakeholders involved in trade, making India inherently suspicious of FTAs it has signed and is negotiating.

The RCEP negotiations are hampered by the nagging fear of imports, more so because Southeast Asia, Japan and South Korea are those with whom India has FTAs, and which, arguably, have deluded the country with imports, notwithstanding evidence pointing to limited use of these FTAs. Concerns over RCEP are heightened by the presence of China, which, even without an FTA, is among the largest sources of India’s manufacturing imports. The current government is focusing hard on removing domestic infrastructure constraints. This would reduce production costs and make Indian exports more competitive. But that would take several years. And even then, imports would remain necessary for exports, as India is unlikely to become as broad-based a manufacturing economy as China, Japan, Thailand or Mexico. The government’s silence on FTAs and trade engagement is conspicuous and baffling. If the strategy is to stay away from FTAs since they enable imports, India might as well give up hopes of becoming a global manufacturing hub and manufacturing exporter in the foreseeable future.

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