India's new trade policy: Blinded by local market, a dry recitation of laws

India's trade policy remains blinded by its huge domestic market. This was underlined last week when the govt released its latest trade policy - three years late

By Mihir Sharma

Short of striking oil, history has presented countries with no better path to prosperity than trade. There is one very simple reason for this: scale. Countries that produce goods and services for the world not only can specialize, but also build up larger factories and sectors than they would otherwise since they are serving demand from multiple countries’ populations, not just their own.
 

In most nations, the need for scale is obvious. Not so in India, which remains blinded by its huge domestic market. This was underlined last week when the government released its latest trade policy — three years late. A new policy is supposed to be produced every five years, and this one was due in 2020. It was supposedly delayed so the Indian government could analyze and respond to the vast shifts in the global trading environment brought on by the pandemic.

No such rethinking is visible in the document. Instead, it is a dry recitation of the laws and processes that regulate Indian trade, one that makes no real effort to engage with the policy issues at stake. You will search in vain for the basic analysis that informs similar white papers elsewhere in the world. No attempt has been made to explain how New Delhi views global economic systems and India’s place in them.

This failure is both deliberate and revealing. It’s deliberate because India’s approach to trade — while no longer reflexively negative — remains incoherent and contradictory. And it is revealing of the fact that Indian policymakers no longer seem to believe India can become a great trading nation. While they may hope we will be as rich as China one day, they don’t think we will export as China did and does.

For economists in New Delhi, the sharp difference between the amount of energy that goes into foreign affairs versus trade policy can be dispiriting. Policymakers at the highest level are keen to debate geopolitical shifts and India’s balancing role in the global order, and to consider how they might nimbly advance our medium- and long-term interests. When it comes to trade, decision-making is left to middle-level bureaucrats — or, worse, to chambers of commerce who have never seen a tariff they didn’t want to double.

This is particularly odd because we are living through a period in which geopolitics and trade policy have become intimately connected. I write this from Tokyo, where policymakers may not have entirely made their peace with the new protectionism that has infected friends and allies such as the US, but who nevertheless intend to work with those partners to ensure Japanese consumers and corporations do not unduly suffer.

I’m sure there are some in New Delhi, too, who understand the possibilities of this moment, as multinational companies look to reorient supply chains to reduce their dependence on China. After all, the central argument for diverting investment to India is the fact that it is a more reliable partner for the West. This is why we have begun work on several new trade agreements, including one with the European Union.

Yet little of that broader understanding spills over into the construction or implementation of trade policy, as this latest document proves. We aren’t looking for ways to build trust with trading partners such as Japan. Nor are we focused on how to share the burdens of sourcing and supply to promote a shared economic security.

Instead, the best we can offer are half-hearted incentives for manufacturers to shift their operations to India. When we can at most set aside $10 billion for semiconductor subsidies while the US plans $40 billion or so, that’s not a game we can win.

What should concern Indians most is that, in the end, this attitude suggests their government does not believe in them. Politicians in India fear greater economic integration because they aren’t convinced that India can be competitive with its peers. Even as our political class relentlessly touts Indian ambition and capabilities, they seem sure that we will never make things as well or as cheaply as Southeast Asia or even Bangladesh, let alone China.

And the cost of this lack of confidence? We cannot promise that we will become part of the redirected, resilient supply chains that investors, both here in Japan and elsewhere, want to build.

In the meantime, China is using its current lead to entrench itself at the center of the supply chains that will define the next century. China’s autocrats trust their people to flourish in an open world. India’s democrats don’t share a similar faith in their citizens. That attitude may prevent us from ever overtaking China.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper