Commerce, competitiveness and currency internationalisation can help strengthen India’s position
By Gaurav Sharma
The economic ramifications of COVID-19 have a significant bearing on reshaping the world economic order as countries weigh their external linkages and recalibrate development strategies. For India to claim its rightful position in the new world order, it is imperative that the vision of ‘Aatmanirbhar Bharat’ is globally integrated to harness the opportunities created by the emerging shifts.
In the post-pandemic era, the world economic order is set for a recast with huge gaps emerging between the performance of countries. According to forecasts by the OECD, by end-2021, the US economy is likely to be the same size as it was in 2019, but China is expected to be 10% larger. Europe and Japan would languish below their pre-pandemic level of output and could do so for several years. From India’s perspective, recovery in GDP growth is firmly on track and sets the foundation to regain our position as the fastest-growing major economy next year.
At this critical juncture, it is important to set the vision of positioning Aatmanirbhar Bharat in the new world order with priorities closely linked with our global aspirations. Moving in this direction, our focus should be on three interconnected strategic priorities, i) increasing India’s share in world exports and FDI, ii) enhancing global competitiveness in manufacturing for greater participation in GVCs, and iii) promoting greater use of rupee in settlement of cross-border trade and investment.
First, on trade and FDI, it is crucial to reaffirm that Aatmanirbhar Bharat is not mistaken for an inward-looking India. As PM Modi has emphasised, the path taken by India is not about being self-contained but strengthening our position in global supply chains. Bolstering international trade and investments is key for India to lift its GDP growth and per-capita income. Pertinent to note is that while India is currently the world’s fifth-largest economy, its GDP per capita is a fifth of the world average.
Globally, trade and FDI have been crucial vehicles for enhancing economic growth and reducing poverty. Arvind Panagariya, former vice chairman, NITI Aayog, in his book “Free Trade and Prosperity (2019)” analyses performance of more than 200 countries between 1960 and 2013, demonstrating a causal relationship between trade and per capita income. The findings show that the countries that experienced intensive growth for a period always maintained a high and/or expanding trade to GDP ratio. Similarly, in the case of FDI too, many studies have established a strong positive long-term correlation with GDP per capita.
However, the share of India’s exports of goods and services in GDP has declined steadily from 24.5% in 2011 to 18.7% in 2019. At 13th position globally, India has a share of 2.2% in world exports of goods and services—nearly a fifth of China (10.6%). It is noteworthy to mention that India’s trade to GDP ratio has surpassed that of China since 2008, but our imports outweigh exports significantly. A renewed focus is required to rejuvenate exports with a special emphasis on high potential manufacturing sectors—electronics, apparels, pharma, among others. Strong comparative advantage in services sector suggests focus can be on high-value services exports in ICT, healthcare, and business and professional services.
With regard to FDI, an analysis of G20 countries reveals that India achieved the highest growth of 20.3% (CAGR) in FDI inflows between 1990 and 2019. However, in value terms, India ranked 9th globally in 2019, which shows further potential to move up the global order.
Second, achieving a higher share in exports and FDI needs to be oriented with a push for greater global competitiveness. This requires investment in infrastructure, particularly in power and logistics, and reducing the regulatory compliance burden on companies. There is no doubt that the emerging shifts in global supply chains provide India a significant opportunity to attract multinational companies. At the same time, sustained efforts are needed to build technical capacities and scale of Indian enterprises for enhancing participation in GVCs. It will also be crucial to embrace Industry 4 with greater adoption of frontier technologies by the Indian industry.
Finally, thrust on expanding trade and investment can be supplemented with promoting greater use of rupee in international settlements to be more resilient to external shocks and currency risks. India needs to take a leaf from China’s playbook on currency internationalisation. In 2019, the cross-border RMB settlement amounted to RMB 19.7 trillion ($2.8 trillion), accounting for 38.1% of China’s total cross-border settlement. On trade, cross-border settlement reached RMB 5.2 trillion ($745 billion) with a share of 15% in China’s total trade.
From India’s standpoint, steps can be taken to enhance trade settlement in rupee in a two-pronged process: (i) regionalisation—strengthening the mechanism already existing with Nepal and Bhutan and extending to other major countries in the region, and (ii) internationalisation—involving key partner countries globally.
While there will be natural considerations on the balance of trade positions with partner countries, a broad-based push to currency internationalisation and greater global acceptability of rupee can come from setting a goal to be the next currency for inclusion in IMF’s SDR basket. This will require meeting conditions such as scale of exports with the largest value over a five-year period and “freely usable” currency criteria, ie, widely used to make payments for international transactions, and widely traded in the principal foreign exchange markets. While India performs favourably vis-a-vis other emerging economies on the freely usable criteria, a significant increase in exports will be needed.
To conclude, linking the vision of Aatmanirbhar Bharat with global strategic priorities of enhancing 3Cs—commerce, competitiveness & currency internationalisation can be a cornerstone to strengthen India’s position in the post-pandemic new world order.
The author is Senior specialist (economics & finance), NITI Aayog. Views are personal