If we can stick to the reforms suggested by the HLAG report and check any manipulations of the trade agreement, we may climb out of the trough
Yes, we need to be cautious no doubt but there is a lot of misinformation that has been spread by special interest groups with respect to the Regional Comprehensive Economic Partnership (RCEP) trade agreement. These groups want India to avoid becoming a member of one of the region’s biggest trading blocs and their arguments are like the ones made by many during India’s Independence. Consequently, India embarked on a protectionist regime post-Independence till we opened up our economy in 1991.
Since then, the country has witnessed an impressive growth rate and it has lifted millions out of poverty. Several estimates suggest that at present, India’s poverty rate as per the Suresh Tendulkar Committee’s poverty line, is in single digits. One may disagree with the Tendulkar poverty line (I know I do!) but that’s a separate subject which we will discuss later. For now, it is important to recognise that the country’s growth rate accelerated during the trade liberalisation regime. Consequently, we’ve witnessed an ever-widening level of prosperity which coincides with an increase in India’s middle class population base.
During the recent launch of a report by the High-Level Advisory Group (HLAG), it was mentioned that no country had managed to sustain a growth rate of over seven per cent without exports. Indeed, evidence does point to this fact and, therefore, we must look at exports as an important driver of our growth. This is precisely why the RCEP is critical as the nature of world trade has become far more complex today than what it was during the 1990s.
Globalisation 1.0 ensured that manufacturing value chains emerged across countries and value-addition, therefore, took place across a host of countries. This was made possible by the low cost of containerisation, competitive advantage of several countries and a regime of low import tariffs that ensured low cost inputs were accessible for further value-addition. Unfortunately, the country missed out on this opportunity due to our high levels of tariffs and while the Unite Progressive Alliance Government (UPA) did introduce some trade agreements, the high levels of corporate tax rates and high cost of capital made Indian industries uncompetitive. Things have changed, especially since one of the biggest corporate tax cuts of the 21st century which was announced by the Finance Minister on September 20. Moreover, we’re looking at further lowering of interest rates which implies a relatively lower cost of capital in the near future. India’s recent investments in infrastructure and improvements in ease of doing business are also critical in improving the country’s competitiveness.
The HLAG committee has demonstrated how the country benefits from entering into the trading bloc. It has further identified sectors where India has a competitive advantage and has provided a detailed roadmap of reforms over the next couple of months. If the Government undertakes these reforms, then combined with the lower corporate tax rates and low cost of capital, we’d witness our first-ever industrial revolution. The arguments for protectionism are explicitly political in nature and have been provided in the past. The most cited argument is the “infant industry argument” which states that the domestic industry won’t be able to compete with international products and, therefore, we should protect the same.
However, it has been found repeatedly that protectionism doesn’t help domestic industries become competitive. Further, our lack of trade agreements with many countries, including the European Union (EU), has often resulted in our exports being less competitive as our competitors are in general quick to enter into such agreements with other countries. Moreover, by protecting industries through tariffs, especially for sectors that produce critical raw materials for other industries, we subject the other industries to a high input cost. This in turn makes even our competitive industries uncompetitive in the international market. To those who are stating this argument, one must ask why despite competitive costs of taxation, adequate investments in infrastructure and strong domestic markets, are they unable to be competitive? The ongoing trade war has resulted in a unique opportunity to bring some of the global manufacturing players that are looking for a China plus one manufacturing strategy to the country. However, if India wants to be integrated into the global value chain, then it must be a part of regional trading blocs and revert to the policy of gradually reducing tariffs across commodities.
We embarked on a policy of high tariffs and barriers to trade for decades only to realise later the opportunity costs we paid for the same. The low growth of our industries, scarcity of resources and inefficient enterprises are all a legacy of the socialist policies before the 1991 reforms. The current trade war, possibility of a Brexit, RCEP and trade negotiations with the US are all an opportunity to seize the moment and embrace globalisation.
(The writer is a New Delhi-based public policy researcher)