India’s international trade and economic engagements for domestic development imperatives

Published: August 1, 2019 11:20:34 AM

In an open economy, both exports and imports contribute to GDP growth. For achieving the US $ 5 Trillion target by 2024 a growth rate of 11 to 12 percent per annum would be required.

India, international trade, economic engagement, domestic development, GDP growth, 5 trillion, india economy, Macroeconomics, FDI Employment generation means income generation which in turn leads to demand for products from other sectors of the economy. (Reuters Photo)

By Ram Upendra Das

India has set a target for itself of becoming a US $ 5 Trillion economy in some years from now. Within the realm of India’s domestic developmental imperatives; poverty alleviation and employment generation are of paramount importance, so is the infrastructure development. Addressing these challenges with a clear-cut strategy can help us achieve the GDP target. Let us see how.

In a closed economy, GDP is driven by consumption and investment, both of public and private sectors. In an open economy, both exports and imports contribute to GDP growth. For achieving the US $ 5 Trillion target by 2024 a growth rate of 11 to 12 percent per annum would be required. For the sake of brevity, let us focus just on domestic infrastructure development. Various estimates suggest that India needs investment in infrastructure in the range of US $ 2.5 to 5 trillion in the next 25 years. Even if we set a target of US $ 500 billion of investment in the infrastructure sector in the next five years, the investment multiplier effects would be enormous. The demand for goods and services would increase from various core sectors. These may include higher demand for steel, construction materials, architectural, designing, engineering, accountancy services, among others. Demand for workers and professionals across skill-sets would increase, leading to massive employment generation. And employment generation is the best antidote to poverty alleviation. What is more, this increased demand would engender a spate of supply-side production and manufacturing response. On the supply-side, thus augmented scale of production, would lead to further employment generation and opportunities to reap profits by producers and entrepreneurs.

Employment generation means income generation which in turn leads to demand for products from other sectors of the economy. An upward spiral of economic activities is therefore unleashed. All culminating and aggregating to GDP growth and higher levels of GDP year after year. The US $ 5 trillion of GDP can be achieved.

This is where the framework of Open Economy Macroeconomics Dynamics sets in. No country’s GDP is just it’s own. One country’s consumption could be due to another country’s investment. My country’s manufacturing and profits through exports could be driven by imports of another country. A capital-rich country brings FDI into my country and reaps profits whereas my country benefits from manufacturing and employment generation. Trade in goods, trade in services and FDI are interlinked. Consumption and investment are intertwined, that too in an inter-country context. Moreover, countries could have differentiated products and services in the same sector and indulge in intra-industry trade, for instance, India can export one type of medicine and import another type which is essential and unavailable domestically.

A phenomenon such as above is observed in the developed world as also in the dynamic economies of the developing world. This is further accentuated by the evolution of Global and Regional Value Chains (GVCs and RVCs). Essentially, the future patterns of economic growth and development would be increasingly geared by tapping the dynamics of global, regional and bilateral economic interdependence. Inter-country interdependence would assume greater importance as the industrial, digital and technological revolution 4.0 unfolds.

So, what should be India’s strategy for scaling up economic growth and development. It must pro-actively complement its efforts to strengthen the domestic economy with both domestic efforts as well as by stepping up international trade and economic engagements with other countries. This would have to be done by keeping in mind the regional specificities and country-specific trade and economic complementarities. A template of what India needs and what a country or a region can offer to India in our developmental and economic growth pursuits needs to be prepared. Domestic sensitivities would have to be taken care of but also in a manner that India’s economic and trade engagements actually are made to work for the same domestic sensitivities by making sensitive sectors stronger rather than weaker.

It is with such a template India must intensify its efforts to provide economic leadership in South Asia; galvanize its ‘Act East’ policy; conclude RCEP, EU and EaEU (Eurasian Economic Union (EAEU) negotiations; negotiate a comprehensive trade agreement with the USA and Canada; engage proactively with Africa, and finalize the FTAs with Latin American countries. This is because every region is economically unique both in terms of opportunities and challenges.

Since RCEP is one of the largest economic groupings in the world; India must play a pro-active role in concluding it as it provides opportunities for infrastructure development in India and solutions for ensuing technological and industrial revolution 4.0 via greater integration across trade in goods, trade in services and investment. Special emphasis on RCEP is the call of the hour as this is one external economic engagement of India which is near-finalization. With this, India would be a step closer to realizing its aspiration of becoming a US $ 5 Trillion economy in near future!

(The author is Head of Centre for Regional Trade, New Delhi. Views expressed are personal.)

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