India must put in all its reform effort into policies that will increase the international competitiveness of Indian firms and encourage both foreign and domestic investment.
The new Indian government led by prime minister Narendra Modi swept into power on a promise of improving economic conditions in India. A critical focus of the reform effort must be policies that will increase the international competitiveness of Indian firms and encourage both foreign and domestic investment. These decisions will have profound effects on Indian economic growth and poverty reduction in the coming decades.
The policy efforts should have two dimensions. One reinvigorate multilateral trade negotiations held under the auspices of the WTO; Two, undertake an aggressive domestic reform agenda that will be helpful regardless of the features of future trade agreements.
The former means a far different approach than recent unfortunate Indian actions surrounding adoption of the trade facilitation agreement negotiation in Bali in December 2013. Many countries share India’s concern about food security. But the vast majority of WTO members, both low-income and high-income, have taken umbrage at perceived Indian reneging.
The announcement of a preliminary deal between the U.S. and India on November 13 may cause some in India to celebrate a ‘victory’ about food security. But the reality is that India’s approach reinforces the view in Washington and elsewhere that global WTO negotiations are a waste of time. The U.S. as well as many other important economies, are already looking at fora outside the multilateral trade system to further liberalisation efforts. In short, Indian recalcitrance may result in agreements that shut out Indian trade opportunities, which one would presume was not the intention of the new government.
Regardless of the long-term status of the WTO negotiations, the Modi administration cannot afford to wait for domestic economic reform. Effective and far-reaching reform that encourages trade and investment will help renew economic growth. These reforms should not be undertaken because they might benefit foreigners but instead because they are in the long-term deep interest of India.
India has a profound interest in maintaining the rules-based multilateral trade system, which unfortunately is under unprecedented strain as a result of a moribund WTO negotiation process. The dysfunction has resulted in major economies seeking other venues for integration. For example, the U.S. has shifted almost its entire negotiating resources towards agreements with the EU (TTIP) and a separate one for countries of the Pacific Rim (TPP) and the Trade in Services Agreement, none of which include India. Completion of these and other similar agreements not only further complicate the international trade and investment system but also will lead to discrimination against Indian commercial and economic interests.
India would be best served by working to reinvigorate the WTO liberalization process rather mimicking the U.S. and EU preferential trade agreements. This would mean hard decisions by the Modi government that could be unpopular domestically but could bring new life to WTO negotiations.
India’s approach in recent years has been to drive a very hard bargain at the Doha Round. The WTO consensus-based decision-making process has given India and other emerging economies like Brazil and South Africa substantial leverage in preventing a broad multilateral agreement. Of course, high-income countries like the U.S. and EU have also played a major role in the dysfunctional WTO process. Unfortunately for emerging economies, high-income countries have alternative arrangements and agreements that they can pursue. In short, failure of the Doha Round does not mean that the world stands still and may very well leave India behind.
As a clear leader of lower-income countries, India plays a particularly important role to help maintain the WTO system. Less developed countries have the most to lose from preferential trade agreements such as TTIP and TPP. These countries would be left out of setting the rules for new trade and investment issues set by the world’s major economies.
India’s leadership would be critical to regaining WTO momentum. The recent stance by the Modi administration on implementing the trade facilitation agreement that arose in the Bali WTO ministerial is exactly the wrong way to move forward. Whatever the merits of the Indian government’s stance towards a near-term solution to issues of food security, this approach risks further undercutting the interests of major economies to spend time and resources on WTO negotiations.
Of course, India cannot by itself determine whether the WTO is recast as the primary forum for trade negotiations or whether countries move towards preferential agreements. The Indian government cannot force other WTO members to make their own politically difficult changes necessary to reach a compromise.
But the Indian government can undertake domestic policy reforms that likely will be beneficial in a host of global environments. These include reforms that affect the investment climate and increase the competitiveness of Indian firms. Moreover, research over the last two decades make clear that trade liberalisation is not a panacea; sensible and appropriate domestic reform can play at least as important a role as eliminating trade and investment barriers.
The first set of general reforms focus on improving the climate for business within India, especially for investment. The well-known World Bank “Ease of Doing Business Rankings” indicates the need for these changes. The 2014 reported ranked 189 countries and put India in position 134 (compared to 41 for South Africa, 97 for the People’s Republic of China and 116 for Brazil). There naturally are potential problems with this index and the specific numerical rankings. Moreover, India has made progress in some of the areas examined for this index. But the overall message of unhelpful impediments to business is one that found resonance within the Indian electorate in the 2014 election cycle.
The array of possible reforms is influenced by social and political realities. Nonetheless, it is useful to identify those areas that could help the Indian economy. These reforms include:
One, reductions in administrative burdens and red tape for domestic economic activity;
Two, tax reform that broadens the tax base while lowering the marginal tax rate;
Three, improving the internal market by reducing state-level regulatory and fiscal burdens;
Four, reducing judicial backlogs, especially in enforcement of contractual obligations;
Five, labour market reform, including reducing the restrictions on dismissing redundant workers;
Six improved intellectual property protections.
Significant improvements in these areas likely would lead to increased domestic and foreign investment.
The Modi administration has a golden opportunity to improve the lives of hundreds of millions of Indian citizens. Making the correct decisions on trade and investment policies will play a key role in seizing these opportunities.