India Must Embrace Competitiveness

As the post-1991 Indian experience reveals, an open trade and investment environment is indispensable to achieving key economic goals such as GDP growth, external sector stability, and a welfare-enhancing diversified consumption basket. With country-specific endowment constraints in a scenario of complex manufacturing processes and diverse consumer preferences, no country can optimally fulfil all prerequisites for a thriving economy in isolation.

Notwithstanding recent reordering, the vertical disintegration of manufacturing across global value chains reflects this. As we saw in pre-reform India, policies that curtail cross-border integration result in inefficiencies, a vitiated investment climate, and stunted domestic capacities by limiting access to the productivity embodied in high-quality imports, and curtailing overseas market access.

Why then is the adoption of open trade so controversial and challenging? The answer lies in the fact that while global integration is beneficial overall, it creates both winners and losers. Sectors that can compete and exploit expanded global opportunities gain, while those that cannot, lose. This gives globalisation its detractors, whose organised protests tend to drown out the less voluble winners, including millions of silent consumers benefitting from a more diverse and affordable consumption basket. This makes policies aimed at minimising the pain through enhancement of competitiveness, economic restructuring, social safety nets, etc., critical while pursuing trade openness. The mixed impact of trade does not, however, merit forgetting the harsh pre-1991 lessons of shortages and consumer deprivation and painfully relearning them.

The Indian experience, starting with our biggest FTA by way of the 1991 reforms and followed by FTAs with South Asian neighbours, ASEAN, Japan, South Korea, etc., shows that openness leads to net overall gains. It is apparent that we are infinitely better off today than in 1991, including in balance of payments stability, though some segments have suffered. Criticism of FTAs on a narrow bilateral trade deficit basis, while ignoring the extensive economy-wide productivity and export-enhancing impact of imports validated by overwhelming macroeconomic evidence, is not well-founded. Gains from trade are shared with trading partners in proportion to relative competitiveness. It is Trade Theory 101 that while both sides gain, the more competitive partner gains more. Protectionism in response to trade deficits only worsens outcomes by reducing competitiveness.

Ultimately, adverse economic consequences result from competitiveness and productivity deficits. These consequences cannot be escaped through protectionism. The only sustainable protection possible for an economy is competitiveness. If somehow, contrary to the evidence, there is a lingering doubt on the prudence of our post-1991 approach, we need only look at the disastrous impact of Brexit on the UK. US President Donald Trump’s quickly discovered restraint in the recent brief trade skirmish with Canada and Mexico offers similar lessons.

For India, the risks of moving further along the path of recent tariff increases and various non-tariff measures are not trivial. Tariffs, used in a measured manner, are important instruments for optimally shaping and regulating cross-border economic activity. However, as instruments of protection, indiscriminate broad-based application can raise costs and undermine competitiveness. They are best adopted for initially protecting inherently competitive infant industries or fulfilling clearly identified sectoral investment ambitions. Even here, other limited duration support like PLIs is preferable, as tariffs are hard to undo and have long-run impacts on competitiveness and consumer welfare. Tariff protection for our auto sector may be a case in point. Given this, the forthcoming negotiations on account of recent WTO violative US pronouncements may have a silver lining.

Non-tariff measures (NTMs) by way of product standards and conformity assessment processes are also key instruments for raising domestic manufacturing standards, addressing sub-standard imports, and upholding strategic and security interests. They must, however, involve ease of compliance and accompany domestic quality enhancement. Unless predicated on a competitiveness and capacity-based domestic supply response, NTMs will act as barriers and restrict availability of critical inputs.

The adoption of tariffs in the past and NTMs today by developed countries is cited as evidence of their efficacy as a panacea for development, while forgetting that the success attributed to them came from the underlying competitiveness created. The shrinkage in the share of manufacturing in India, below potential investment flows, expansion of the rural/informal workforce, stagnation in growth, and strain on the rupee, are pointers to the risks of drawing wrong conclusions in this regard.

The rapid transformative power of an investor-friendly strategy is apparent in a late starter like Vietnam, which is confidently concluding FTAs with the EU, and blocs like RCEP, CPTPP, etc. Clearly, India too must pursue its economic goals through competitiveness by creating a world-class investment environment with a stable policy and regulatory framework based on the global best practice, efficient land-based plug-and-play manufacturing platforms with the requisite infrastructure and logistics linkages and a genuine single window for all approvals and regulatory oversight at the pre-investment, project implementation and operational stages, to attract investment.

Given its multi-faceted capabilities, India can, in principle, be second to none in this. The recipe for success, however, is well established and affords limited scope for any Indian exceptionalism.

The author is Anup Wadhawan, Former Commerce Secretary. Views are personal.