India should shed its myopic approach to trade deficit and free-trade deals

South Asia Monitor, November 14, 2019

By Pradeep S Mehta and Amol Kulkarni

By not entering into such free trade deals, while we definitely are not going to get respite from cheaper high-quality goods, but are definitely making lives difficult for our exporters, write Pradeep Mehta and Amol Kulkarni for South Asia Monitor

In October 2019, the World Health Organisation released its first-ever World Report on Vision. It estimated that myopia, or short-sightedness, affects a whopping 2.6 billion of the global population. Fortunately, while India escaped the worst affected list, a majority of our policymaking, industry, and expert community appears to have contracted a unique form of myopia: an intellectual one. This is evident from India’s decision to pull out of the Regional Comprehensive Economic Partnership (RCEP), at least for now. While a small window of opportunity lingers, India is unlikely to be part of what could have been the world’s largest free trade deal, with its fastest-growing economies as members.

Fears of a large and widening trade deficit were core to India’s decision. Such fears, though not unfounded, are clearly exacerbated as a result of intellectual myopia. The inability to distinguish bad from good trade deficit is the root cause. The import of low cost or high-quality products is not necessarily bad for the economy.

If a poor consumer who previously shelled out six rupees for a battery cell can save four rupees by getting a similar quality imported battery cell for two rupees, such import is certainly beneficial. At some point in time, such a consumer is likely to invest her savings of four rupees in the economy by increasing her consumption. Her consumption needs will be met by increased production or enhanced service delivery, thereby generating employment. The domino effect thus caused will ultimately boost growth.

Similarly, if the import of high-quality ballpoint pens force domestic manufacturers to improve their competitiveness and compete efficiently, the economy clearly gains by such imports. An opportunity is created for domestic manufacturers to compete globally and export. (Sachin Tendulkar may not have become a world-class player if he had just played in India and our cricket team was insulated from foreigners). Sensing such opportunity, when some manufacturers enhance production by sourcing additional raw materials, employing more people, a chain reaction kicks in different sub-sectors of the economy, which ultimately benefits the economy.

Imports are not restricted to consumer goods. A significant proportion of Indian imports, an expert puts it at 37%, are intermediate goods/inputs which go into exports, after value addition. If the import of cheap active pharmaceutical ingredients (APIs) provides an opportunity for domestic generic pharma manufacturers to compete in global markets by exporting at globally competitive prices, such imports are obviously welcome. In order to export, domestic pharma manufacturers invest in production, research and testing facilities. The consequent demand for and supply of skilled labour and infrastructure ultimately boosts growth.

These are not just some hypothetical examples but real instances of stakeholders and ultimately the economy benefits in the past two decades owing to our subscription to free trade. We now risk partial undoing of such past gains.

Of course, these examples come with caveats. The import of cheaper battery cells would force unviable domestic battery cell manufacturers to move out of the market. Similarly, domestic producers of ballpoint pens, who would not be able to compete with high-quality imports, might face tough times. Also, domestic suppliers of APIs could be adversely impacted owing to the import of cheaper APIs. Problems faced by such industries would trickle down to persons employed in such sectors, who might then been freed up for hopefully exploring better employment opportunities offered by more productive firms, as economic theories suggest.

Another often ignored aspect of efforts to contain trade deficit by not entering into free trade deals is opportunity cost. By not entering into such free trade deals, while we definitely are not going to get respite from cheaper high-quality goods, but are definitely making lives difficult for our exporters. With the coming into effect of RCEP, trade barriers are likely to come down among member countries. However, India will continue to face export restrictions/ conditions to such countries, making our products further uncompetitive. Given that we do not have free trade deals with the US or EU, we are already facing difficulties in enhancing our exports to these regions, and now RCEP countries will be added to the list.

It is thus a blunder to view trade deficit in isolation, without reviewing its concomitant positive and negative impacts on the economy and employment, and causes thereof. Lack of adequate data and insufficient industry-academic-government linkages hinder our ability to make well-informed decisions.

Our myopic approach tends to result in counter-productive decisions. For instance, in the above examples, how would have a prohibition on imports of battery cells, ballpoint pens, and APIs, solved the problem of lack of competitiveness of domestic industry? Does the answer not lie in making it easy to run a business and export goods and services by creating enabling conditions and ensuring the availability of factors of production at globally competitive prices.

At the same time, should the domestic industries not be more enterprising and welcoming of opportunities to compete globally, instead of showcasing apocalyptic scenarios and wailing for protection. It is not that domestic industries have not been supported in the past. Loads of tax benefits, subsidies and exemptions have been provided, but in vain.

It is high time that we do away with our myopic approach to trade deficit and free trade deals like RCEP; else we will end up missing our vision of a better and developed future. Our dream of a $5 trillion economy by 2024 will slip to 2034, by when we could be a $10 trillion economy.

The authors work with CUTS International, a global public policy research and action tank

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