Enough of the old ‘level playing field’ argument. Reduce trade barriers to make India grow – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/enough-of-the-old-level-playing-field-argument-reduce-trade-barriers-to-make-india-grow/articleshow/88862488.cmsSynopsis

Data from the IMF’s October 2021 World Economic Outlook reveals that India’s real exports growth moves in tandem with the growth in global real exports. Consequently, the steep decline in India’s export growth since 2018 onwards is mirrored by a decline in global export growth in general

Shishir Gupta

Shishir Gupta

Senior fellow, Centre for Social and Economic ProgressAbhishek Kumar

Abhishek Kumar

Associate fellow, Centre for Social and Economic ProgressDivya Srinivasan

Divya Srinivasan

Research analyst, Centre for Social and Economic ProgressCovid-19 has set the Indian economy back by almost two years. In absolute terms, the Indian economy has just managed to reach the pre-pandemic level: real GDP of ₹35.73 lakh crore in Q2 2021-22 is at par with Q2 GDP of ₹35.62 lakh crore in 2019-20. There has been a lot of euphoria on how this recovery is led by a sharp turnaround in India’s real exports, which had de-grown by -1.9% and -5.9% in 2019 and 2020, respectively.

The cheer is not unfounded. The RBI‘s database on Indian economy shows that relative to pre-pandemic levels, exports are 17% higher and capital formation is 1.5% higher, while the other two components, namely, private consumption and government consumption, are 3.5% and 17% lower, respectively.

Since faster exports are a time-tested strategy for accelerated growth, it becomes imperative to understand if the recent export performance indicates a structural change for the Indian economy, which bodes well for long-term growth, or is it explained by a rebound in the global trade and, hence, represents a continuation of the past trend?

Data from the IMF’s October 2021 World Economic Outlook reveals that India’s real exports growth moves in tandem with the growth in global real exports. Consequently, the steep decline in India’s export growth since 2018 onwards is mirrored by a decline in global export growth in general. Most importantly, the rebound of India’s exports is taking place in an environment of an equally strong rebound in global exports. Covid-19-induced uncertainties notwithstanding, global trade is likely to do well over the short and medium terms, all else remaining equal.

India’s exports should do well also. The same IMF projections suggest the average world real exports growth rate at 5.12% during 2021-26 compared to an average growth rate of 3.16% during 2014-19.

While India’s exports have always been strongly driven by global exports, the impact has strengthened significantly over time; the correlation of India’s real exports growth to world exports growth was 0.40 during 1980-2000, which increased to 0.80 during 2000-20. This increase in export sensitivity to world trade has happened in an environment where correlation of India’s exports to imports has also increased from 0.49 during 1980-2000 to 0.83 during 2000-20. Higher exports leading to faster growth leading to higher imports. Thus, the positive correlation is obvious.

Trade in Harmony
However, what explains this significant increase in correlation between India’s exports and imports? Increased sensitivity is reflective of India’s increased integration in the global value chains. Crude oil and gems and jewellery are classic examples of this entrepot trade. This is also reflected in higher imports in recent quarters, consistent with higher exports.

Higher integration in global value chains is a reflection of the success of trade reforms carried out since 1991. In the beginning of 1990s, the weighted average import tariff rate in India was more than 50%, which were slashed significantly, and by 1997, it was around 20%. The compulsory important licensing was done away gradually for all goods except on health and safety grounds.

Restrictions on exports of goods were removed. Now it is limited to mainly primary sector goods and on health and environmental grounds only. Currency was devalued by 22% in 1991 as part of the reform that also enhanced trade competitiveness. It is, thus, a combination of key trade and macroeconomic reforms that made India competitive and led to its integration in global value chains.

Although India has significantly reduced trade barriers over the years and has greater integration with global economy, it still has miles to go. India’s trade-to-GDP ratio has declined from its peak of 55.8% in 2012 to 39.4% in 2019. This requires us to do more in terms of removing trade bottlenecks. For example, according to the latest data available from the World Bank, in 2019, the simple tariff rate in India (10.21%) was almost twice of the rate in China (5.39).

It is in this light that one needs to analyse the government’s recent trade policies. As part of the budget 2020-21, basic custom duties were raised (2.5-20%) on many items on the pretext of creating a level playing field for domestic manufacturers and promoting value additions in the domestic electronics sector.

Disadvantage Export
This level-playing argument is not going to help India’s exports and growth ambitions. Costlier imports, which act as inputs for Indian industry, will make our exports costlier, making us uncompetitive in global markets.

As Nirmala Sitharaman presents the budget on February 1, she would be well advised to clarify India’s stance and commitment towards a freer trade regime. Because it helps the Indian economy.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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