Opinion by Rajat Kathuria, Neha Gupta
Opinion Critics don’t get it — free trade is good for India
Contrary to the narrative that India is being used as a dumping ground, it has maintained a surplus in finished goods trade with many FTA partners, including ASEAN countries
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Although the Union budget is not the best place to look for trade-related announcements, it has become one of the several platforms that communicates India’s policy engagement with the global economy. In the upcoming budget, we expect to hear announcements relating to reducing the trade deficit, stemming the rupee’s depreciation and promoting exports — all in the same breath. Why are periodic policy announcements in the budget even required when continuity and certainty would do the trick for our external objectives? Are frequent changes in the customs duty structure the right instrument to support the laudable Make in India initiative?
Can these objectives be realised without integrating into global value chains (GVCs)?
It is widely felt that India’s relatively high tariff rates are inimical to more integration into GVCs. It is also true that customs duties are no longer an important source of overall tax revenue, but rather an instrument to accomplish other policy objectives, one of which is protectionism. US President Donald Trump levied tariffs on ChFinese imports in 2018, citing its unfair practice of state support for enterprises.
China retaliated, which led to an escalation of tensions. Trade wars hurt everybody. Although Trump says “tariff” is his “favourite word in the dictionary” and that he would use tariffs to boost domestic manufacturing, he has held off on the 60 per cent increase he had promised on the campaign trail. Instead, 10 per cent is all that is supposed to be levied on specific Chinese goods beginning February 1. Perhaps the message in Trump dialling down is that tariffs are not the best way to boost local manufacturing in an interconnected world.
India will do well to internalise that lesson. Combined with high tariffs, frequent changes do not help. An example is the fluctuating tariff on components used in mobile phone manufacturing. Lenses for camera modules in phones, initially duty-free in 2019, were subject to a 2.5 per cent duty in 2021, only to become duty-free again in 2023. Similarly, PCBAs and moulded plastics for phone chargers faced a duty hike of 10 per cent in 2018, which was further increased to 15 per cent in 2021. While parts of chargers became zero duty in 2018, these were subsequently taxed at 10 per cent in 2021. The last budget saw a reduction in the basic customs duty on mobile phones, their chargers and PCBAs to 15 per cent from the 20 per cent imposed in the 2018-20 period.
Unquestionably, policy instability takes its toll on exports and FDI. India’s export growth remains stagnant; its share in global exports lingers around two per cent. Lowering customs duties and stabilising policy are, however, unlikely to be sufficient either in the upcoming budget or subsequently. Trade policy requires comprehensive reform, including the establishment of a dedicated committee to ensure policy consistency and to formulate an action plan to achieve the objective of $2 trillion in exports by 2030. In this regard, the recent declaration by the CEO of NITI Aayog that “India is one of the few (big) economies which is not a part of large trade agreements” needs serious evaluation. Mega trade blocs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP) are reshaping global trade, but India is ambivalent about their utility.
We feel that India’s stance on RCEP and CPTPP is not based on an informed discourse. Damage to local manufacturing, a persistent trade deficit, and a nationalistic zeal manifested in “Make in India” govern the discourse. These assertions, for the most part, are not backed by data but given popular appeal, they have resulted in a long-standing reluctance to pursue second- and third-generation trade reforms, or for that matter, to even stimulate an informed debate. The reason India “suffers” trade deficits with agreement partners is as much instructive of the political discourse as it is misleading about the economic impact of trade agreements.
Both RCEP and CPTPP exclude the US. CPTPP goes a step further by keeping China out, potentially leading to easier negotiations. A close examination of recent trade data reveals interesting insights. First, India’s deficit is dominated by intermediate goods imports. The share of intermediate goods in total imports has been around 70-80 per cent under FTAs with ASEAN countries (except Singapore). It is above 90 per cent with the UAE and Australia. This is good because it improves the competitiveness of domestic manufacturing and exports. India’s intermediate goods exports have also risen suggesting the possibility of increased forward linkages.
Second, contrary to the narrative that India is being used as a dumping ground, it has maintained a surplus in finished goods trade with many FTA partners, including ASEAN countries. Additionally, evidence shows that India’s exports of finished goods have grown after signing trade agreements, mitigating to some extent the political anxiety of a trade deficit. For example, total exports to ASEAN members increased from $5 billion in 2003 to above $40 billion in 2022-23, while exports of finished goods increased from $2 billion to more than $20 billion in the same period.
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We conducted a simulation exercise comparing the impacts of joining RCEP and CPTPP on India. The model predicts that CPTPP will have a more balanced trade effect. The exclusion of the two domineering global powers offers a better negotiating environment. In contrast, RCEP, dominated by China, poses potential risks. While RCEP could facilitate trade in intermediate goods, it is likely to aggravate India’s trade deficit. The model predicts that RCEP would lead to a substantial rise in India’s imports, with China being the primary beneficiary. While imports would also increase in the case of CPTPP, primarily from ASEAN, there is also potential for export growth to countries like Mexico, Canada, and Australia. Additionally, CPTPP’s focus on quality standards and intellectual property aligns with India’s long-term economic aspirations. CPTPP appears to be a more practical and strategic pathway, both economically and politically. With China excluded, the political economy will be easier to navigate.
However, a word of caution. By itself, trade openness will not deliver unless accompanied by domestic reform to remove structural deficiencies. All things considered, a re-evaluation of the pessimism surrounding trade agreements is called for.
Kathuria is Dean, School of Humanities and Social Sciences at Shiv Nadar University and Gupta is an independent researcher.
Views are personal