<b>Jayanta Roy:</b> India's looming BoP challenge

Next-generation trade reforms are urgently needed to stave off a balance of payments crisis

India now faces very severe global headwinds that can create a major strain on the balance of payments (BOP), since its exports have been stagnant for several years. The anti-globalisation and anti-immigration drives in the United States and parts of Europe may result in reduced market access for exports of goods and services. This coupled with a likely rise in US interest rates may negatively impact the flow of remittances and foreign institutional investments. Continuation of rising oil prices as a result of tensions in West Asia may increase our import bill.

Nationalist policies in advanced countries may limit the flow of foreign direct investment and dampen our “Make in India” initiative. Our information technology giants are already affected by the impending H-1B visa reforms. Trade barriers related to the emerging issues in data privacy and data restrictions are now the areas of maximum concern for the future growth of off-shore professional and technical services models (such as business process outsourcing or knowledge process outsourcing).

India needs to urgently implement the next-generation trade reforms to boost exports and promote sustained growth and jobs. The benign neglect of exports in the government and elsewhere is a cause of great concern. Our foreign exchange reserves were boosted largely by the global tailwinds of rapidly growing global trade and the sharp decline in oil prices in the last decade. These can be sharply eroded by the emerging global headwinds enumerated above.

Given the complexity of the current global trade landscape, trade reforms must be designed and implemented in a timely manner by a competent wing of the government. India urgently needs better management of its international economic relationship. The current institutional arrangement that disperses strategic decisions to the ministry of commerce and industry (MOCI) and the ministry of external affairs (MEA) lacks the necessary depth. MOCI has little understanding of the complex next-generation trade reforms that are needed, since it is run by bureaucrats with no experience in trade policy. The ministry is ill-prepared to deal with the complex trade negotiations we are likely to face, with the US giving up free trade and the Trans Pacific Partnership, and China positioning herself as the champion of free trade.

India needs to find a niche in a likely China-dominated Asian regional integration. Simultaneously, India needs to adjust to a new US-India strategic partnership. Unfortunately, MEA also has no trade policy expertise in the ministry. What is most puzzling also is that there does not seem to be any coordination between MOCI and MEA. Trade policy also seems to be outside the radar screen of the NITI Aayog, the PMO and the finance ministry. If this trend continues, the prime minister may have to go in for the next general elections in 2019 burdened with severe BOP problems.

Given the cross-cutting nature of the 21st century trade agenda, leadership should not rest with any line ministry. What is needed is an “apex entity” like the United States Trade Representative in the US, which has a clear mandate from the PM to consult with stakeholders and manage the process of developing strategy. This entity cannot be solely responsible for implementation, as that will by necessity involve many players inside and outside government. Instead, its role in the implementation phase is to act as a coordinator and convener, and to have the mandate to monitor and assess implementation by the relevant agencies within the government.

Anti-globalisation sentiment in the US and parts of Europe may squeeze market access for India’s exports

The proposed apex entity will ensure that all agencies that are involved with trade activities — line ministries, regulatory bodies, state governments — know what the goals are. They are fully informed of the priorities that are defined by the strategy, and use it as a framework that guides their activities. The entity would provide executive sponsorship, vision and strategic direction. It would lead the process of trade strategy design and oversee the overall trade performance and update the strategy when required, based on feedback and impact assessment.

The apex entity should have three trade experts to carry on the tasks, with a small secretariat. The first is a Trade Negotiator responsible for all trade negotiations at the multilateral, regional, and bilateral levels. The second is a Trade and Competitiveness Economist to provide a framework for policies related to domestic regulatory reform in various sectors to reduce the cost of doing business, and for strategic policy-making more generally to improve India’s global competitiveness. The final requirement is a Trade Facilitation Expert responsible for drastically reducing the trade transaction costs epitomised by high cargo dwell times in ports and airports, and time-consuming administrative processing of trade documents by numerous agencies. 

To be effective, these economists should be internationally reputed trade experts similar to those recruited for the positions of chief economic advisor, vice-chairman of the NITI Aayog, and Governor of the Reserve Bank of India. 

We also need to reverse the present situation of earmarking all posts of senior economic advisors for Indian Economic Service officers, and go back to recruiting top economists as economic advisors in MOCI, NITI Aayog, the energy sector, MEA, and in the PMO. We should, as before, let the Union Public Service Commission select the most qualified candidates from a carefully chosen short-list of the best internal and external candidates. We need to ensure that these economic advisors interact fruitfully with the three trade policy experts in the apex entity to help implement the 21st century trade reforms.

There is an urgent need to create the institutional framework described here for India’s global trade and investment engagement. This alone could help India to avert the possible BOP problems that loom large on the horizon. But the time to act is now. 
 

The writer was economic advisor in the Union commerce ministry