Trade-Led Growth for India

September 22, 2015 2:30 PM

India is growing at about 7 percent per year, faster than any other large economy. But it must grow at 8 to 10 percent to employ its one million new workers every month and to eliminate poverty for 300 million of its poor citizens. Prime Minister Narendra Modi has set precisely such a goal for his country.

But India can reach that goal only by sharply increasing its engagement in the world economy. No country, including India a decade ago, has ever achieved sustained growth of 8 percent or more without double-digit export expansion. India seeks to accelerate in part by increasing the share of manufacturing from 16 to 25 percent of its economy through the prime minister’s “Make in India” initiative, which will require exports from that sector to climb by 12 to 13 percent annually.

But India’s trade has stagnated. The share of both manufactured exports and services exports in GDP has flatlined for the last several years, and neither has regained its peak of 2008. The responsiveness of India’s exports to global economic growth has plummeted. The merchandise trade deficit has reached record levels. India’s “Swiss cheese” trade agreements have left it outside most of the world’s global value chains. It ranks 142nd out of 189 countries on the World Bank’s “Ease of Doing Business” index. India has clearly lost competitiveness.

This situation is likely to get worse as India’s main trading partners start discriminating against it. The Trans-Pacific Partnership (TPP) means that Vietnam and Malaysia, for example, will soon have preferential access to textile markets in the United States, Japan, and other major countries. At least half a dozen more countries, possibly including China, will apply to join the TPP as soon as it enters into force. An Asia-wide trade bloc that excludes India will reduce its exports by at least $50 billion per year. With the Transatlantic Trade and Investment Partnership (TTIP), the European Union and the United States, India’s two largest markets, will also be providing preferential treatment to each other, against India and other outsiders. India will increasingly be left behind by the global trading system.

India’s only recourse is to embark on a new strategy of trade-led growth. First, it must substantially boost its own competitiveness by adopting the domestic economic reforms proposed by Modi. The most important are enactment of the goods and services tax, reform of land use and labor laws, and massive infrastructure investments.

Second, it must add a trade policy dimension to its economic strategy. It can join the major plurilateral negotiations in Geneva to open markets for trade in services and environmental goods—sectors of Indian strength. It can greatly improve some of its weaker trade agreements, as with Japan and Korea. It can restart its free trade negotiations with the European Union.

Most important, India can seek to join the TPP (or a broader Free Trade Area of the Asia Pacific [FTAAP] that might succeed it). India’s exports could expand by more than $500 billion annually from participation in such a grouping. This expansion of 60 percent would be more than for any other country. India’s national income would rise by more than 4 percent, a huge gain. The country’s growth, employment, and poverty reduction targets could be achieved. Its global status would be enormously enhanced, sharply expanding its ability to contribute to geopolitical balance and stability in the region.

Membership in the TPP (or a successor FTAAP) has to date been limited to economies included in the Asia Pacific Economic Cooperation (APEC) forum. India should thus renew its application to join APEC now that the organization is lifting its moratorium on membership. It should seek entry by next year when APEC will begin discussing next steps for trade liberalization in the region.

These new trade policy steps would reinforce the prime minister’s domestic reforms by greatly increasing their payoff. Conversely, the improvement in India’s competitiveness stemming from the reforms would enable it to confidently open its own markets and thus to insist that others open theirs to key Indian products. Many other countries have successfully pursued such a strategy, linking internal and external reform, including China when it joined the World Trade Organization, Mexico when it joined the North American Free Trade Agreement, and Japan when it recently decided to join the TPP.

The United States has a keen national interest in India’s success, in both economic and foreign policy terms. President Obama, in a partial reversal of previous US policy, indicated earlier this year that he “welcomed India’s interest in APEC.” He should support India’s entry once India convincingly begins to implement the Modi reform program and add a credible trade dimension to it. The objectives of the two countries coincide and the close personal ties between the prime minister and the president should enable them to launch a new era in the relationship, as well as the next “miracle” in the world economy.

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C. Fred Bergsten Senior Research Staff