A new agenda for great power status

India needs to recalibrate its economic approach, focusing on trade, manufacturing, and the informal economy

The installation of a newly elected government is an opportunity to review the country’s economic strategies. The annual Budget will soon be presented in Parliament. This should set forth an economic strategy that underpins the achievement of Viksit Bharat (Developed India) status by 2047, the 100th year of India’s Independence.

There are certain boundary conditions that must underlie this strategy. India cannot replicate China’s growth trajectory. China opted for a resource- and energy-intensive pattern of growth, essentially following the model of industrialisation of the developed world. As an economy similar in scale to China, India cannot emulate the Chinese model. The world does not have room for another China, cornering most of its energy and material resources, including new strategic minerals and metals. Neither is the Chinese model compatible with the demands for ecological sustainability and meeting the urgent challenge of climate change.

China has probably reached peak greenhouse gas emissions this year, and these emissions will now begin to decline. On a business-as-usual trajectory, India’s emissions will inevitably rise, exposing it to growing international pressure to peak its emissions and begin reducing them as climate urgency intensifies across the world. To maintain its growth prospects, India will need to pioneer a different economic strategy that is resource-frugal and capable of achieving an accelerated transition from its current reliance on fossil fuels to an energy system progressively based on renewable sources and cleaner energy, including nuclear fission and fusion energies. India is already in this energy transition but needs to drive it much faster than at present.

India is the fifth-largest economy in the world and may even achieve the third rank within the current decade. But this will not translate into matching geopolitical influence unless this translates into expanding economic engagement with the global economy. The aim should be to expand India’s foreign trade so that it becomes the third-largest trading power in the world. India’s external economic footprint is modest. Currently, India accounts for 1.8 per cent of world exports and is ranked 18th. It accounts for 2.8 per cent of global imports and ranks ninth worldwide.

India should not blindly follow the protectionist policies being adopted by other major economies. It must be mindful of two key features of global trade today.

One, much of this trade is structured through regional trade arrangements, so it is in India’s interest to be part of such arrangements, in particular, the Regional Comprehensive Economic Partnership (Rcep). The ambition should be to, sooner rather than later, apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Both these are Asia-centred trading arrangements and it is Asia that will remain the most dynamic component of the global economy in the years ahead. Indian commitments under these agreements may be structured appropriately, and within a suitable time frame, as some other developing country participants have been able to do. India should revive its application to join the Asia-Pacific Economic Cooperation (Apec), which is not a trading arrangement but a key platform for sharing best practices, promoting policy coherence, trade facilitation and investment and providing market information.

Two, nearly 70 per cent of world trade currently flows through regional and global supply chains. India must be part of these chains if it aims to be a global trading power. A high custom tariff regime is incompatible with participation in supply chains. Since 2014-15, there has been a consistent increase in India’s tariffs across the board. The former vice-chairman of NITI Aayog and a noted trade economist, Arvind Panagriya, noted in an article in the Times of India titled “How high import duties are costing India dear” that while the uptick in tariffs began in 2014-15, the real break came in 2018-19, when “a massive 42.3 per cent of all tariff lines went up, and the average of Customs duties increased from 13.7 per cent to 17.7 per cent.” This, as he rightly observed, “clearly marked a switch from liberalism to protectionism.” This trend must be reversed if India is to emerge as a globally competitive economy. The forthcoming Budget should reflect this change. Domestic value addition should rely on more speedy structural reforms, such as upgrading infrastructure, regulatory and policy reform, and technological innovation. Tariffs are a lazy instrument to promote domestic manufacture.

No country in the world has achieved significant economic progress without a vibrant manufacturing sector. In a country like India, with a large and growing population and a large young cohort, the emphasis should be on labour-intensive manufacture. In the early phase of industrialisation, the informal sector with small and medium units, will remain the major source of employment. The temptation to prematurely force formalisation of the economy should be resisted. Even as modern and inevitably capital-intensive industry is being promoted, the informal economy, too, should be encouraged. The goods and services tax (GST) is a major reform but its provisions and compliance procedures impose large transactional costs on small and medium units. There is a good case for greatly simplifying GST procedures and for raising the exemption limit for its applicability to a much higher turnover figure than the current Rs 40 lakh.

The production-linked incentive (PLI) scheme also requires a re-think. By its very nature, it promotes technology and capital-intensive industry, which does not generate significant employment. The same scarce resources currently budgeted for PLI could be better spent in creating an enabling environment for small and medium industrial units, whether in the formal or informal sector.

Despite attempts to expand the formal economy, over 50 per cent of the economic activities in India remain in the informal sector. An International Labour Organization report claims that over 80 per cent of non-agricultural employment in India is in the informal economy. Rather than being dismissed as a dispensable vestige of under-development, the informal economy should be embraced as a potential source of vibrant growth and employment. This is not incompatible with a modernising economy.

A new political dispensation offers the chance to engage in fresh thinking on the economic front, questioning long-held assumptions and testing new approaches. This debate should go beyond the portals of officialdom and engage the wider civil society. The direction we set today will determine the fate of India in the years to come.

The writer is a former foreign secretary